Credit Scores
A credit score is a single number that helps mortgage lenders and others decide how likely you are to repay your outstanding debts. One kind of credit score is a FICO score (FICO stands for Fair Isaac Corporation Inc., the company that developed a common scoring method). FICO scores range from 400 to 900 points.
When you apply for a home mortgage, your credit score is evaluated. Your credit score may also be used to determine the mortgage interest rate.
Your credit score is based on several types of information contained in your credit report:
- Your payment history.
Late payments will decrease your credit score.
- The amount of debt you owe.
If your credit cards are at their limits, this can lower your credit score
- even if the amount you owe isn’t large.
- How long you’ve used credit.
Your credit history is important. If you show a pattern of managing your credit
wisely, keeping credit card balances low, and paying your bills on time, your
credit score will be positively affected.
- How often you apply for new credit and take on new debt.
If you’ve applied for several credit cards at the same time, your credit score
can go down.
- The types of credit you currently use.
This includes credit cards, retail accounts, installment loans, finance company
accounts, and mortgages.
Your credit score is only one factor in the credit decision. Mortgage lenders also look at your credit report, employment history, income, debt-to-income ratio, and the value of the home you want to buy.
What the Numbers Mean
FICO does not make specific statistics available to the public regarding credit scores. However, they do provide some snapshot numbers that can help you understand how to interpret your credit score:
- Credit scores ranging from 770 to 850 are considered very good, and the best credit rates are usually available to borrowers within this.
- Credit scores above 700 are considered good, according to FICO, and most borrowers’ credit scores are within this range. The median credit score is about 725.
- When credit scores are below the mid-600s borrowers may experience higher interest rates when looking for a loan.
It is important to remember that credit scores are like snapshots of your credit – they show a "picture" of your credit based on current information. By using credit wisely, you can improve your score over time.
How scores are determined
According to FICO, they weigh different aspects of credit differently:
- punctuality of past payments later than 30 days past due
.
- the amount of revolving debt, expressed as the ratio vs. total available revolving credit (credit limits)
.
- length of credit history
.
- types of credit used (installment, revolving, consumer finance)
.
- recent searches for credit and/or amount of credit obtained recently
Credit Reporting Resources
Credit Bureau Score:
A number representing the possibility a borrower
may default; it is based upon credit history and is used to determine
ability to qualify for a mortgage loan.
Another Reason to Pay Your Bills on Time
More mortgage lenders, wary of taking undue credit risks, are looking at new ways to gauge whether to lend consumers money, such as how they pay their rent and utility bills. Here’s how credit bureaus and others are using nontraditional payment data:.
In addition to using data from Equifax’s own credit files, as well as data it has collected on rent and utility payments, for example, the score pulls information from LexisNexis to verify identities and flag any negative information, such as tax liens, bankruptcies and criminal records. Score range: 501 to 900.
Relies on payment data, such as telephone and utility records and catalog or Internet purchases, provided by eBureau LLC, in addition to data from its own credit files. Score range: 100 to 999.
Looks at information on how consumers pay their rent, cable and utility bills, among other things, by pulling information from several databases and public records. The score has the same range as the traditional FICO score: 300 to 850.
The score, which is used by mortgage lenders, is based on alternative payment sources, such as rental, insurance and utility payments.
At PRBC, consumers can create their own credit file by reporting monthly payments to the company, which verifies the data for a fee and creates a credit file and score for lenders. Users can also use a bill-payment service to have their bills automatically reported to PRBC for free.
In addition to using data from TransUnion’s own credit files, the score relies on data provided by L2C Inc., such as consumer’s payment histories on their rent cable and utility bills. Score range: generally between 300 and 850.
For more helpful mortgage tips on understanding credit socres, mortgage refinancing, home loans, reverse mortgages or a home equity line of credit, contact FreeLoanComparison.com today!
Last update: November 14, 2008
