FICO Scores: How Your Credit Report is Assessed

Lenders use a credit scoring system created by the Fair Isaac Corporation in order to assess a potential borrower’s FICO score.  Every borrower falls into this range, with the lowest possible score at 300 and the highest at 850.  Borrowers with lower scores have to pay higher interest rates and loan origination fees because these borrowers are deemed as having more risk associated with lending money to them.  This general rule is based on research from the Federal Housing Association – also called the FHA.  These studies showed that borrowers with a score of less than 620 were more likely to default on loans in the future.  These well known tendencies are the reason that FICO scores are so important when applying for a home loan.

Your FICO score is based solely on your credit report.  So, as your credit report changes, so does your FICO score.  However, it usually takes several months from the time you make changes to your credit report to see the actual changes in the FICO score.  This delay shows how crucial it is for borrowers to talk to a lender well before it’s time to buy a home – especially if they think they may run into some credit issues. 

It’s certainly possible to improve your credit enough to buy a home in six or eight months – depending on your individual situation.  But, know that these changes don’t happen overnight.  In fact, this time frame is the minimum amount of time you can expect to see changes in your credit report and FICO scores.

If you’re a newer credit borrower, know that you won’t even have a FICO score for the first six months of getting your first account.  In other words, you have to have an account that has been opened for at least six months in order for FICO to give you a score.

If you’re a borrower who’s an old timer, this idea applies to you, too.  In the past six months, one of your accounts must be updated (meaning that you’ve made a payment, etc.).  FICO has this six month rule in order to make sure that the score reflects recent information. 

Because your FICO score uses only information from your credit report, lenders also consider other aspects showing your ability to make payments in the future.  For example, lenders look at income to ensure that you make enough money to make the payments.  They also look at your job history to see if you’ve kept a steady job the past few years.