How Is Your Fico Credit Score Calculated When Applying For A Loan?

Do you ever wonder how loan and mortgage companies make a final decision whether or not to lend you any money when applying for a loan? Most of the decision made is entirely based on what your credit score is on your credit report. The most frequently used tool when determining your credit score is one called the FICO, which is the acronym named after the company who developed it, called Fair Isaac and Company.

Every time you apply for a loan, the bank or the finance company makes an inquiry to a credit reporting agency.  The credit reporting agency then uses the information given to them by the finance company and creates a report based on information in its own records and some information derived from public record source.  All the information collected and inserted automatically into a software program that uses a series of algorithms to estimate if you will be able to pay back the loan.  The program calculates the estimation by comparing information about you.  The more your information matches with their ‘ideal’ profile, the higher your credit score will be.

The following are among the things that the FICO software calculates when determining a credit score:

·          how long you’ve been in your current job

·          how long have you have lived at your current address

·          the length of time you’ve had credit of any type

·          how many loans and credit cards you own

·          If you have ever made any late payments (or if you made any in the past 4 years) on credit accounts

·          whether you have paid off any loans in full

·          if you’ve had an account put on a collection agency

·          how much debt you have

·          how much available credit you have

You credit score is affected only by a small number of factors, but how much will your credit score affect the chances of you obtaining the mortgage you want?

Your credit score represents a big factor in deciding whether or not to grant a mortgage or loan to you, however, many financial experts indicate that banks and finance companies will take other different factors into account as well.  Most follow their own underwriting policies and scoring systems of which the FICO system is only one piece of the entire process.  Those could include your employment history, the local job market and lots of other things.  Based on all these different aspects, a company could decide to lend you a mortgage despite a low credit rating – or refuse your credit even if have a high credit rating.

A common belief is that a low credit score is forever.  This is completely untrue.  Your credit score is very fluid – It is simply a representation of your current situation and the ability to repay a loan that’s been offered to you.  For this reason, the newer information added to your credit report is what will potentially affect your credit score – and the older those credit mistakes are, the less they matter.  Sometimes, it will take only 4 to 6 months of on time payments to raise your credit score high enough to qualify you for a new loan or mortgage.  A salary raise, a new job, or paying off a couple of credit cards could make the difference between a rejection and an approval for the loan that you want.

These are the ratings that the credit agencies use to evaluate your credit score:

A: 901 - 990 = Excellent Score

B: 801 - 900 = Great Score

C: 701 - 800 = Good Score

D: 601 - 700 = Fair Score

F: 501 - 600 = Bad Score

Would you like to rate your credit score yourself for free? Click here to use our free Credit Score Calculator. Please note that the 'E' will replace the 'F' in the calculator to represent bad credit.

 *note, the calculator will open a new window, if it doesn't come up, allow the link on your popup blocker, or try holding the Ctrl key on your keyboard and then clicking on the link.