As the FHA, Fannie Mae, Freddie Mae and other lending institutions require higher FICO scores for mortgage approval or for lower loan rates, people particularly realtors, home sellers and potential homebuyers have become more concerned about how their FICO scores are really calculated. They are also becoming curious about why their scores are falling when they haven’t done anything to push down their scores.
Recently, the National Association of Realtors called on FICO creator Fair Isaac Corp. to tweak the FICO software so it can detect when the actions of banks or credit card companies regarding credit are due to change in their policies and not on the spending or borrowing behavior of consumers. It cited the reality that consumers who are in good credit standing lose points because credit card firms and banks unilaterally lower credit limits or cancel credit lines.
The FICO scores of consumers are calculated based on several factors, which largely point out to how they use their credit. These are:
- Credit history – This accounts for 35 percent of the FICO score.
- Use of credit – This accounts for 30 percent, and it refers to how much of the available credit limit is being used. A person who’s using only $5,000 of his credit line of $15,000, for instance, has a higher score for this factor than one who’s already spent $12,000 of the same credit line amount.
- Length of credit history – This takes 15 percent of the FICO score. A person who has proven his creditworthiness over many years has a higher score than one who has not yet proven his commitment and ability to pay debts. This is the main reason why young newly-employed people have much lower scores even if they’re already financially savvy.
- Frequency of application for new credit – This makes up 10 percent of the score, and it refers to the number of times a person has applied for a new loan or credit in the recent past.
- Diversity of credit types used – This also takes up 10 percent.
The last time Fair Isaac revised the calculation of FICO was in 2008 when it decided to protect the credit scores of mortgage-delinquent homeowners who did everything to be able to pay their other debts.
Now, NAR is calling on the FICO experts to address credit line reduction or cancellation.Last year, from April to October, about 14 percent of U.S. consumers had their credit reduced due to factors beyond their control. This is the matter NAR wants FICO to give attention to, as the score is crucial in the approval of home loan applications.