Why your FICO really ain't that scary...
Posted by Kelly
Thu 23 June 2022
Forget all the hullabaloo — let’s look at what your FICO actually affects when you’re going for a loan.
As we know, when it comes to a home loan, that interest rate is super important — so let’s start there.
Your credit score does affect your interest rate. It’s actually just one of a number of things (including your zip code, loan term, and your property type) but generally the lower your credit score, the higher your interest rate and monthly payments.
Here’s the good news about that — as your FICO increases, your rates, and monthly payments decrease. And we’ll show you how to start tipping those particular scales in your favor in a minute.
Cool. So, how else will your credit score affect your application?
Interest rate aside, lenders will adjust a handful of other things based on your credit score.
According to the Fannie Mae Eligibility Matrix (that’s pretty much the bible for working out whether or not people are able to get a home loan or refinance), your credit score will affect:
- your loan to value ratio (LTV) — if your FICO is on the higher end, you may be able to borrow more, up to 95% of the home’s value.
- how much you need in reserves — if your FICO is on the lower side, you may need more reserves in the bank.
The good folks at MyFico have prepared a super handy breakdown of what rate and monthly payment you’ll get based on a range of FICO scores. Check it out here.
Finding your FICO.
Ugh, how rude of us — all this talk about FICO scores and we haven’t even told you where to find yours.
Jump onto any one of the three big credit bureaus here to get your score:
The Federal Trade Commission has a free resource where you can request your credit report — check it out right here.
Or, check with whoever you bank with — sometimes they’ll give you access to your FICO free (how kind of them).
Here’s how lenders land on your FICO score.
It’s pretty straightforward really. You’ll generally have a FICO score with each of the three credit bureaus we just mentioned. And plot twist — your score will vary between bureaus. If you want to know why that is, MyFICO explains it in detail here —knock yourself out!
Lenders will use the middle of your three scores. If you’re only with two bureaus, lenders will use the lower of the two scores.
Now, if you’re applying with another person, lenders will work with the lowest of your scores — more on how to work around that later.
So, uh, what’s the ‘minimum’ credit score?
Aha! That’s the million-dollar question. When it comes to the standard conventional loan, the minimum credit score is around 620.
If that’s sounding a little lofty — you could try for an FHA loan. If your credit score is between 500-579, you could qualify with a 10% down payment. If it’s 580 or higher, you may only need to put down 3.5%.
Here’s what they look at to figure out your score.
Okay, let’s look broadly at how your FICO score is calculated. Getting a feel for what makes up your score will help you prioritize what changes will make the biggest difference.
Essentially your FICO score is figured out using five different categories with varying levels of importance placed on each:
> payment history (35%)
> amounts owed (30%)
> length of credit history (15%)
> new credit (10%)
> credit mix (10%)
It’s worth noting that those percentages (levels of importance) are a general guide and can actually change from person to person.
Now, here’s where we direct an imaginary laser pointer at the ‘payment history’ section. As you can see, it makes up a big ol’ chunk of the FICO pie.
Payment history looks at how reliably you pay off your debts. It’s not about how quickly you’ve paid them off — old debts paid off regularly and steadily are the holy grail.
The next most important category is ‘amount owed’ and as the name suggests, this takes into account your total debt.
But here’s the thing — they’re not getting all weird about how much you actually owe. You can have a decent amount of debt and not be a high-risk borrower.
What they’re actually most interested in is your ‘credit utilization’ on revolving accounts. So basically, how much of your available credit you’re using.
So a couple of credit cards near their max? Not ideal — it suggests that you may be overextended. No credit cards at all? Hmmm, slightly better.
A credit card that you pay down regularly over time? That’s precisely the kind of revolving debt that can actually have a positive impact on your credit score.
The ‘Length of credit history’ isn’t actually something you can do much about — but if you’re looking to buy a place, we’re guessing you’ve got some sort of credit account in place.
Onto ‘credit mix’ — the credit score gods like to see a good variety of credit accounts in the mix. So, installment accounts like personal and student loans, and revolving accounts like credit or store cards. Showing you can manage different payment structures and amounts make you look like a responsible grown-up, who can also most likely keep their house plants alive.
So should you run out and open a new credit card account for an immediate credit score boost? Not necessarily, it could have the opposite effect. The reality is, every situation is different so probably best to chat to a Loan Guide about what impact it’d have on your credit score — good, bad, or otherwise.
This feels like the perfect time to discuss how rate shopping affects your credit score.
So we’ve discussed how your credit score affects your application but what about the other way around — what happens to your score shop around for a loan?
Well, applying for credit triggers a ‘credit inquiry’. A ‘soft inquiry’ won’t affect your credit score. A ‘hard inquiry’, which is generally what is triggered when you apply for a home loan, will affect your credit score to the tune of 3-5 points or less.
Hard inquiries stay on your credit report for about two years. But you don’t need to sweat that too much — lenders are more interested in seeing you pay on time and that your credit utilization ratio isn’t silly (we spoke about that earlier).
BUT, there is a way to shop around without affecting your credit score too much — we’ll chat about that in the next section….
Right. Here’s the juicy bit where we tell you how to fix your FICO.
> Let someone else do the work.
When you’ve got your credit report in your hot little hands/inbox — take a look and see if there’s a ‘potential score improvement’ box like this one…
Some credit agencies will offer an optimization service to improve your credit score and offer very specific advice on how you can improve your credit score.
> Ditch the dead weight.
If you’re applying with someone else, lenders will use the lowest FICO score of the two borrowers. Take a look at your FICO scores and if your co-borrower is letting the team down, consider applying on your own. As long as your DTI still stacks up, you’ll be in a way better position.
> Get out the monocle.
This could be a quick win — take an in-depth look at your credit report for any errors and fix them, lickety split! According to an FTC study, one in four people found an error on their credit report that might affect their credit score. That’s 25%!
> At the risk of sounding like Captain Obvious, reduce your debt.
That means keeping your credit card balances low, and if you’ve got a few credit cards, hit the high interest ones hardest and pay the minimum monthly amount on the others.
> If you’re shopping around, shop fast and smart.
The folks at FICO suggest that if you’re going to shop around, submit your applications within a 30-45 day window. You see, FICO has figured out how to identify someone who’s looking around and will treat those inquiries as one credit pull. So you don’t have to worry about FICO score death by a thousand cuts.
See where you stand right now.
Okay, so you’ve schooled up and you think your FICO may need some work, or maybe it doesn’t? The fastest way to find out, for sure if your current credit score will get you over the line is to jump onto our calculator. Just throw in a handful of details, including your credit score, and see where you land — you might be surprised.