FICO (The Fair Isaac Corporation) is one of the most ubiquitous and least understood constructs in the financial world. FICO is not a credit company, as many people would likely say, but rather a data analytics company that provides financial scoring to lenders to assist them in pricing loans, including mortgages, to consumers.
If you have ever bought a home, or are presently looking for one, then you have likely heard about FICO and how your score is determined. As of February 2020, FICO has implemented changes that may have a fairly significant effect on your score, depending on your spending history and patterns. In consequence, it might also affect the pricing of home loans for millions of American consumers.
Remember the FICO basics
FICO scores weight the following factors in determining your overall score:
- Payment history: 35%
- Credit utilization (the ratio of how you are using available credit): 30%
- Credit history (how long you have been using your credit accounts): 15%
- Credit mix: 10%
- New credit: 10%
FICO Score 10 and Score 10T
The previous FICO iteration was FICO 9. FICO 10 and FICO 10T incorporate an additional factor into assessing your credit quality. The new FICO scoring will weigh your history of managing revolving debt more heavily than installment debt, such as student loans and mortgages. According to FICO executives, the new scoring system was implemented to create a stronger and more predictive model, and therefore a better, more accurate consumer ranking system.
As a result, an estimated 80 million people will see a change in their FICO score of 20 points or more. Some scores will go up, and others will go down. With the advent of FICO Score 10T, your trailing 24-month credit history will be reviewed. Accruing more debt over time will negatively affect your score, while gradually paying down credit balances will have a positive effect. Also, if you tend to carry balances that are near your credit limit for long periods of time, FICO 10T will also penalize you.
Keep this in mind
Fortunately, FICO 10T won’t penalize you for a spike in borrowing for special events and “one-off” splurges, as long as you revert back to paying off the debt in a timely fashion.
However, for home buyers, the new scoring may make it a bit more difficult to get a loan if you have a history of increasing revolving credit balances. Although, if you have been diligent about paying your debt balances down, then it may increase your score and enable you to obtain a better home loan.
What to do to improve your score
For now, if you are applying for a home mortgage that is insured by one of the government sponsored entities (GSEs) like Fannie Mae or Freddie Mac, there is no need to be concerned about the FICO changes. Lenders involved in GSE loans are still required to use older versions of the FICO scoring system.
Diversifying your portfolio of installment debt and making timely payments can help improve your score. Also, if possible, save a portion of your earnings that can be used during periods of unemployment or other emergencies to avoid using lines of credit during these periods.
Maintaining good credit is essential for obtaining a new home loan or refinancing an existing loan. First Centennial Mortgage provides all types of home loans for first-time and repeat buyers. Our personal processing ensures your home finance needs are met in a courteous and timely fashion. Contact us today to learn more about your loan options.