FICO Credit Scoring – How Does It Work?

When getting a mortgage one of the most important factors is your FICO Scores, or also known as your Credit Scores. There are many things that influence your Credit Scores. One such factor is called something called the Score Card. The FICO credit-scoring system groups people with similar histories together when rating them. These groups are called score cards.

The Bankruptcy Score Card – For Example
If you have a bankruptcy on your report, you will be grouped on a score system with other bankruptcies. Your credit history may look good compared to others in this group, but if the bankruptcy were to disappear from your record, you would then be grouped in with people who have stronger credit histories. Your credit behavior might not look so good compared with this new group.

Example: A man had $53,276 of credit card debt and a 722 FICO score. After paying off $17,000 of debt in a few months, his score rose to 726. A few weeks later, though, his score plunged to 676. What happened and is this normal? This is normal and it happens all the time. Unfortunately, it can happen at the worst time – like when applying for a mortgage.
Such abrupt drops like in this example can often be traced to a negative item, like a delinquency or a bankruptcy, disappearing from a borrower’s credit report. In this case, though, the change was even more subtle.

Maturing and Aging Previously Opened Credit Accounts
The explanation would be that the man had opened a new account the previous year which had placed him in a different scoring group which consisted of consumers who had newly opened accounts. When the recently opened account had aged enough to take him out of this scoring group and put him into one with consumers who had not opened new accounts recently made the score drop.
Confused? Who wouldn’t be with this quirk in the scoring formula? The good news is that gentleman’s score did recover as expected with debts being paid down. It did take several months for his credit score to rebound.

Applying For A Mortgage – Do Not Mess With Your Credit!
With all this said, it is critical when applying for a mortgage that you do not make any major changes to your credit accounts without first checking in with your loan officer. You should avoid opening or closing any new accounts as these actions could dump your credit score even if the action seems like it would have your scores go up.
See Five Fico Score Factors That Make Up Your Credit Scores for more information about what makes up your credit score.
If you have questions about credit scores factors please ask EdGAR.