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FICO Scoring and How You RateDana Fitzsimmons - Broker Associate for Keller
Williams Colorado Springs More cash down on the purchase means less loan to value ratio, known in the lending world as LTV. If you are putting 50% down, you will have a 50% LTV ratio. The more money you put down on your purchase will prove to be less of a credit risk for the lender. Your previous credit history is very important to the lender. Lenders are looking for a history of your willingness and ability to pay back your loans on time. "FICO" and Credit ScoringIf you're in the market for a home mortgage, You've probably heard the term "FICO Score" or "Credit Score". Credit scoring is a means of applying a sophisticated mathematical model to your credit behavior, and the behavior of other borrowers like you. It is a way to more accurately gauge how great of a risk you present to a lender. Although there are a dozens of scoring models being used, the most well known company in the scoring business is the Fair, Isaac and Company, known as FICO. Scoring ModelsScoring models like the one developed by FICO have always been shrouded in mystery, especially when it comes to specifics. Generally speaking, FICO uses your credit history, income, outstanding debt and debt utilization over the years, access to credit, and other indicators of your financial behavior to determine how likely you are to pay your bills on time, or if at all. A numerical score is then developed, typically ranging from 300 to 900, with the low end of the scale indicating a poor credit risk. This can tell a lender whether or not he'll lend to you. For example, a credit score of 620 is frequently cited as a "cutoff point" for loans which can be funded by Fannie Mae or Freddie Mac. Below that, and you're usually considered worthy of the "subprime" market, where interest rates are much higher. According to FICO the breakdown of your score is as follows:
Other things that may play into the mix might include your zip code, how often you've moved and other public and private information about you. Improving Your FICO ScoreSo what do you do if you do not like your FICO score? You can start by closing accounts you do not use. This is also a good idea for security reasons. Accounts with small balances should be paid off and closed. Analyze your debt and decide what you can start paying off. Paying off extra credit cards will not only help improve your credit picture, but you will save money. Reporting agencies track the minimum payment on each account you have open. When you make extra principle payments, that speaks highly of your desire to repay your debts. If you are shopping for a car or furniture, do not let the company run your credit unless you have decided for sure to buy with that company. Running credit and then not following through with the purchase can look like you were turned down for credit on your credit report. Check Your Credit Report RegularlyIf you are interested in getting the best interest rate, then you should know how you look. Good credit scores mean good interest rates available to you. Bad credit scores, means higher interest rates. You are also always vulnerable to identity theft, so checking your credit report will alert you of unauthorized credit activation. Reduce Your Risk of Identity TheftFraudulent charging using your identity can cost money as well as time repairing the damage. If you have discovered identity theft, contact the account immediately and have the account closed and report it to their fraud department. You will need to start the process of having the damage removed from your credit profile on all the credit reporting agencies. Contact the agencies and ask them what their policy is. In most cases you will need to write a letter explaining the fraud.
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