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I'm Ready to Buy, But Whats My Credit Score...
In an effort to continually educate my borrowers, I would like to share an article published by John Galligan who is the Director of Electronic Banking Services at the United States Treasury.
Consumers often sit in Mortgage lending offices and wonder (or agonize) about whether they will qualify for a loan based on their Credit Scores.
Now that consumers are able to know their credit scores, their agonizing should abate. However it will now be incumbent upon consumers to understand how they got their scores and how to maintain them as high as possible.
First of all, it's important to know the source of the credit score and who has access to it. The most frequent used credit score in the mortgage industry is called a FICO score, named after the company that devised it, Fair Isaac and Company, Inc. Fair, Isaac derives the score based on financial information from your creditors. The score acts like an amalgam of financial information about you. The Credit Score is used as a measure of how risky a credit consumer you are based on financial behavior. Keep in mind that factors other than your credit score, such as employment history and income, also influence creditor's evaluation of you credit worthiness.
The 5 Factors:
The following is a listing of 5 factors that contribute to your credit score. The results of these 5 factors added together compose a score ranging from roughly 300 to 850. with an inverse relationship between your credit score and the predicted risk you pose to the creditor. A high credit score (700-800) means that you are a relatively low credit risk, and a low credit score (300-500) means that you are a relatively high credit risk.
1) Track Record:
Your recent track record counts more than your dated track record. While a 30 day late payment won't affect your score as negatively as a 90 day late payment, the bottom line is to make your payments timely! Timely payments of utility bills (phone and electricity) will not influence your score. Only credit accounts, are followed by Fair, Isaac unless 1 of your utility accounts goes into collection.
Percentage of total score=35%
2) Amounts Owed:
If you have high balances on a number of credit cards and installment loans, this situation is hurting your score. Additionally, numerous credit cards heighten the "potential" for accumulating high balances that could jeopardize your ability to repay your creditors. Optimally, own 1 credit card, use it judiciously and pay off monthly.
Percentage of total score =30%
3) Length of Credit History:
The longer you have a credit history, the more likely you are to score better in this category. To determine your length of credit history, Fair Isaac looks at the age of your oldest account and averages the ages of all your credit accounts. This is why new credit can have an adverse affect to your score.
Percentage of total score =15%
4) New Credit:
If you have applied for or have obtained new credit cards recently, you are reducing your credit score.The potential for getting into trouble with multiple cards is at play here. Low introductory rate offers converting to additional credit cards add another listing on your credit report that could account against you. Retail store credit, in addition is often provided by finance companies and a # of these accounts may reduce your credit score.
Percentage of total score=10%
5) Type of Credit in Use:
This factor speaks to a"healthy" mix of credit. Here is what an "unhealthy" mix of credit would look like: Numerous credit cards with outstanding balances, plus large mortgage and auto loans. A "healthy mix of credit would entail managing a reasonable # of credit card accounts and other loans with timely payments. It does not mean having one of each type of credit card account. Using credit cards wisely, rather than not having them at all will boost your score.
Percentage of total score=10%
For Further information:
www.myfico.com
Credit Reporting Agencies:
Experian - 888.397.3742
www.experian.com
Equifax - 800.685.1111
www.equifax.com
TransUnion - 800.916.8800
www.tuc.com
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