Josephine Norton
If your FICO score didn't raise, it could be due to a variety of factors, including your payment history, credit mix, length of credit history, and other criteria. FICO scores are calculated by the data analytics company Fair Isaac Corporation and are used by lenders to determine a prospective borrower's creditworthiness. When it comes to mortgages, lenders tend to use FICO 5, an older version of the scoring model, which includes factors such as employment and residential history. Additionally, lenders might use the median or lower middle score of the three credit bureaus (Equifax, TransUnion, and Experian) when evaluating joint applicants. It's important to monitor your credit score and take steps to improve it if necessary, especially if you're planning to apply for a mortgage.
| Characteristics | Values |
|---|---|
| FICO score used by mortgage lenders | FICO 5 |
| FICO score used by credit card companies | FICO 8 |
| FICO score range | 300-850 |
| FICO score calculated by | Fair Isaac Corporation |
| Factors determining FICO score | Payment history, credit mix, length of credit history, etc. |
| Other scoring model used by lenders | VantageScore |
| FICO score for mortgage with co-signer | Median score of both applicants |
| FICO score for mortgage without co-signer | Middle score of the three credit bureau scores |
| FICO score for mortgage with a spouse | Lower middle score of the two |
| FICO score for mortgage eligibility | 760 for a good interest rate |
FICO 5 vs. FICO 8
FICO Scores are calculated by the data analytics company Fair Isaac Corporation and are used by lenders to determine a prospective borrower's creditworthiness. While FICO Scores are the most widely used credit scores, they come in different versions, with FICO 5 and FICO 8 being the most common.
FICO 5 is an older version of the FICO Score commonly used in the mortgage and auto loan industries. It is exclusive to the credit reporting agency Equifax, one of the three major credit bureaus. FICO 5 is more comprehensive, including employment and residential history along with detailed collection items. It is also less forgiving of unpaid collection accounts, particularly medical ones, making it the preferred choice for mortgage lenders.
FICO 8, on the other hand, is the most widely used version of the FICO Score and is primarily used by credit card issuers. Introduced in 2009, FICO 8 is more forgiving of one-off late payments, provided all other accounts are in good standing. It draws on information from all three major credit bureaus: Equifax, Experian, and TransUnion. FICO 8 is more sensitive to high credit card balances that are close to the card's limit, making it more suitable for credit card companies.
While FICO 5 is commonly used for mortgage lending, it is not the only FICO Score considered. Lenders may also use FICO 2 and FICO 4, which are similar to FICO 5 but sourced from Experian and TransUnion, respectively. These scores are compiled into a residential mortgage credit report, and lenders typically use the middle score when making their decision. Additionally, FICO 8 can also be used as a benchmark for mortgages, as it shares similarities with FICO 2, FICO 4, and FICO 5.
When applying for a mortgage, it is important to monitor your credit score to ensure you get the best rates. While FICO 5 is commonly used, keeping track of your FICO 8 score can also provide a good indication of your creditworthiness. Services like myFICO offer access to different FICO Score versions, including mortgage-specific scores, for a monthly fee.
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Credit card debt
When it comes to credit card debt, several factors come into play. Firstly, your credit utilisation rate, which is the amount of credit you've used divided by your total available credit. Experts recommend keeping your utilisation rate below 30%, and ideally below 10%. A high credit utilisation rate can negatively affect your FICO score, as it indicates that you may be relying too heavily on credit.
Additionally, your ability to make timely payments on your credit card debt is crucial. Payment history makes up 35% of your FICO score, and late or missed payments can significantly lower your score. Lenders view timely payments as an indication of your ability to manage debt and make payments on a loan.
It is also important to note that applying for a new credit card can temporarily lower your FICO score due to the hard inquiry into your credit report. This is something to consider if you are planning to apply for a mortgage soon, as it could further impact your credit score.
To improve your credit card debt situation and raise your FICO score, focus on making timely payments in full and keeping your credit utilisation rate as low as possible. If you can afford to, pay off your credit card balances in full each month. You can also consider consolidating your credit card debt or transferring balances to reduce your overall utilisation rate.
In the context of obtaining a mortgage, it is advisable to monitor your credit reports and address any inaccuracies. Lenders may request your FICO scores from multiple credit bureaus, so ensuring consistent positive payment history across all your credit accounts is essential.
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Credit utilisation
Lenders consider a lower credit utilisation rate to be favourable as it indicates that the borrower is not heavily reliant on credit and is more likely to be able to repay loans. A higher credit utilisation rate, on the other hand, may suggest that the individual is a higher credit risk and may have difficulty managing their debt.
To improve one's credit score, it is generally recommended to keep credit card balances below 50% of the credit limit, and ideally below 20%. This can be achieved by paying down debt or requesting a credit limit increase. It is worth noting that simply increasing the credit limit without spending more will not have a positive impact on the credit score.
Additionally, it is important to make timely payments and maintain a good credit history. Late or missed payments can negatively impact an individual's credit score. Multiple lines of new credit within a short period can also temporarily lower the credit score. Therefore, it is advisable to space out credit applications and ensure timely bill payments to maintain a good credit utilisation rate and a favourable overall credit score.
Furthermore, monitoring credit reports for inaccuracies is essential. Errors or instances of identity theft can negatively impact an individual's credit score and utilisation rate. By regularly checking one's credit report, individuals can identify and address any discrepancies, thus improving their overall credit health.
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VantageScore
When applying for a mortgage, it is important to remember that the credit score on your application may differ from your FICO or VantageScore. While FICO Scores are commonly used in the mortgage lending industry, different versions of the FICO model are used for different types of loans. For example, FICO 5 is commonly used for mortgages, while FICO 8 is mainly used by credit card issuers. Additionally, FICO 8 is more critical of high balances on revolving credit lines, while revolving credit is less of a factor for mortgages, making FICO 2, 4, and 5 more suitable for evaluating mortgage candidates.
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FICO models
FICO Scores are calculated by the data analytics company Fair Isaac Corporation and are based on data from credit reports about an individual's payment history, credit mix, length of credit history and other criteria. The FICO Score was introduced in 1989 and has since seen many updates and multiple specialised spinoff versions designed for specific industries. There are at least 16 versions of the FICO Score, which is used by 90% of top lenders.
The FICO Score 8 is the most widely used version of the base FICO Score model. It is used by credit card companies and is more critical of high balances on revolving credit lines. The FICO Score 5, on the other hand, is an older version that is commonly used in the mortgage and auto loan industries. The FICO Score 5 comes from the credit reporting agency Equifax and is less forgiving of unpaid collection accounts.
Other versions of the FICO Score include the FICO Score 10 and FICO Score 10T, which was introduced in January 2020 and uses trended data to make predictions based on behaviour patterns. The FICO Auto Score 10, launched in 2020, is designed to gauge the likelihood of an individual repaying an auto loan. The FICO Bankcard Score 10, meanwhile, predicts how borrowers may pay their credit card bills and includes greater accuracy among "subprime" borrowers.
It is important to note that your FICO Scores can vary depending on when they are calculated and by which agencies they are calculated. The advanced version of MyFICO® is the most accurate way to keep track of your mortgage-specific credit score.
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Frequently asked questions
There could be a number of reasons for this. Firstly, it is important to know that mortgage lenders use different FICO scores than credit card companies. FICO 5 is more likely to be used by mortgage lenders, while FICO 8 is more commonly used by credit card companies. Therefore, even if your FICO 8 score has increased, your FICO 5 score may not have. Secondly, mortgage lenders often use a "tri-merge" report that contains your credit reports and FICO scores from the three credit bureaus: Equifax, TransUnion, and Experian. They then use the median score from these three scores. If you have been checking your FICO 8 score, this may be why you haven't seen a change in your mortgage FICO score. Finally, it is important to remember that your credit score is just one factor that lenders consider when evaluating your mortgage application. They also look at your employment history, residential history, and other factors.
FICO 5 is an older version of the FICO score that is commonly used in the mortgage and auto loan industries, while FICO 8 is the most widely used scoring model for general lending decisions and is favoured by credit card companies. FICO 5 is considered less forgiving of unpaid collection accounts and includes information on employment and residential history, while FICO 8 is more tolerant of infrequent late payments and uses data from all three major credit reporting agencies.
There are several ways to improve your mortgage FICO score. These include:
- Making on-time payments in full, especially on revolving credit like credit cards.
- Maintaining a mix of "good debt" and "bad debt". Credit card debt can decrease your FICO score, while home loans and other long-term valuable assets are considered good debt.
- Keeping old accounts open. Closing old accounts can raise your utilization ratio and negatively impact your score.
- Adding yourself as an authorized user on a parent's or relative's credit card to benefit from their positive payment history.
A higher credit score will generally get you a lower mortgage rate. A borrower with a credit score of 760 can expect an interest rate of 6.47% on a 30-year fixed mortgage, while a score between 620 and 639 is considered subprime and would result in a higher interest rate of 8.05%. According to Equifax, the national average FICO score as of October 2023 was 717.
