Image courtesy of Pixabay, Money Card Business Credit Card
This famous score goes back to the mid-1950s when two roommates sharing a San Francisco apartment came up with an idea.
What if you could use a computer to predict someone’s credit behavior?
The two roommates were Bill Fair and Earl Isaac. They both pitched in $400 a piece and started Fair, Isaac and Co., Inc. (now known as FICO) in that very apartment.
They wrote letters to 50 American lenders to see if they would be interested in their credit scoring algorithm. One lender accepted their offer and they were in business!
Today the words “FICO Score” has become nearly a household term – and synonymous with financing a home. Let’s discuss how the score works and why having a good FICO score doesn’t necessarily mean you’re going to be presented with the best loan for you.
This score becomes particularly important when you’re applying for a home loan – or any loan for that matter. How good or bad your FICO score is will determine how much you’re going to end up paying for your loan – in terms of both upfront fees and total interest payments.
That’s right – there is a cost to getting a loan.
Not only do you have to pay it back, but also you will pay interest on the loan amount. On top of that, you might be charged additional fees depending on how your loan is constructed. You can substantially reduce the cost of a loan (assuming you’re dealing with a reputable lender – we’ll get into that more later) if you improve your credit score. That’s why it’s important to know what a FICO credit score is and how to improve your score.
Let let’s look at the spectrum of what constitutes a good and a bad credit score:
Your FICO score is calculated based on five areas of your personal credit history and behavior. We made this handy little pie chart to visually show you what you need to be aware of:
The FICO score can be broken down into five factors. We’ve ordered them by most important factors first – that is, the factors that carry the most weight in determining your credit score:
As we said before, there is a cost to getting a mortgage or a loan. And one of the biggest factors is your FICO credit score.
For every FICO point that you can improve on, the cheaper your loan will be when it comes to fees and interest. But remember! Just because you have improved your credit score doesn’t mean you’re going to get the deal of the century.
Getting a loan is still a business transaction and lenders are in business because of fees and interest. It will be up to you to do your homework while you shop. That’s actually one of the main advantages of using BeSmartee when it’s time for you to shop for a home loan. Our marketplace allows you to see all the fees and interest upfront before you begin the loan application process. You don’t have to ding your credit score before applying for a loan!
But let’s get back to the nuts and bolts of the FICO score. Below are a few graphs that show how much your interest rate can fluctuate based on your credit score:
The general trend in the graphs above is that the better your credit score, the lower the overall costs will be when it comes to getting your home loan. But there are two very important things to remember:
The person doing your home loan may have a financial incentive to steer you towards a loan that isn’t optimal for you. The loan they suggest may work for you financially and you may think that you don’t have any other loan options.
The truth is there is a secondary market where your home loan will most likely get sold on. Usually, the higher the interest rate you’ve signed up for, the more valuable your loan is on that market.
That’s why a lender might try to sell you on a home loan that appears affordable, but was actually designed to be more profitable for their business. The deception comes in the form of omission: they will rarely show you all the home loans available for you to choose from.
You should be able to pick the home loan terms that work for you. The interest rate, fees, duration and variability should all be transparent before signing on the dotted line. And most importantly, every loan in the lender's inventory should be available for you to look over. Not just the ones that benefit the lender.
That’s the advantage of BeSmartee. You can see all our home loans and costs up front.
Improving Your FICO Score is always a good thing to do. But there is a second piece to this puzzle. You need to be able to see the complete picture when it comes to all the types of loans that are out there for you. So do your homework and please reach out to us (@besmartee) if you have any questions.
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