How Is Your Credit?
Before you even begin applying for a mortgage loan, you’ll need to be sure you are credit-worthy. There are three major credit reporting agencies (Equifax, Experian and TransUnion) in the United States that maintain records of your use of credit and other information about you.
These records are called credit reports, and lenders will want to check your credit report when you apply for credit. Generally, lenders will also want to know your credit score. What is a credit score? A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. A credit score helps lenders evaluate your credit report and estimate your credit risk. National Credit-Reporting Agencies: Equifax 800-685-1111 (www.equifax.com), Experian 888-397-3742 (www.experian.com), and TransUnion 800-916-8800 (www.transunion.com) You can also go to www.annualcreditreport.com to ask for a free copy of your credit report, once a year, or call 877-322-8228.
The most widely used credit scores are FICO® scores, the credit scores created by Fair Isaac Corporation. Lenders can buy FICO® scores from all three major credit reporting agencies. Lenders use FICO® scores to help them make billions of credit decisions every year. Fair Isaac develops FICO® scores based solely on information in consumer credit reports maintained at the credit reporting agencies. Your credit score influences the credit that’s available to you and the terms (interest rate, etc.) that lenders offer you. It’s a vital part of your credit health. Understanding your FICO® score can help you manage your credit health. By knowing how your credit risk is evaluated, you can take actions that may lower your credit risk – and thus raise your credit score – over time.
Why Do You Want a High FICO Score?
According to Fair Isaac Corporation, the difference between a FICO® score of 620 and 760 can often be tens of thousands of dollars over the life of your loan. A low score can cost you money each month or even stop you from refinancing at a rate you know other people are getting.
How Are FICO Scores Calculated?
The FICO score is based on your credit history and is a compilation of several factors including: your payment history, outstanding credit, length of credit history, types of credit used and new credit you’ve acquired or applied for.
The first thing any lender would want to know is whether you have paid past credit accounts on time. This is also one of the most important factors in a FICO score. Your payment history accounts for approximately 35 percent of your FICO score.
Number of accounts with balances represents approximately 30 percent of your FICO score. The amount owed on all accounts. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
Length of Credit History
In general, a longer credit history will increase your FICO score. However, even people who have not been using credit long may get high FICO scores, depending on how the rest of the credit report looks. Credit history accounts for approximately 15 percent of your FICO score.
Factors here include how many new accounts you have by type of account. It also may look at how many of your accounts are new. How long it has been since you opened a new account? What is the length of time since credit report inquiries were made by lenders. Your new credit accounts account for 10 percent of your FICO score.
Types of Credit Used
Is it a “healthy” mix? Approximately 10 percent of your FICO score is based on this category. The score considers your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your FICO score also takes into account the kinds of credit accounts you have. Do you have experience with both revolving and installment type accounts, or has your credit experience been limited to only one type? How many of each? Your FICO score also looks at the total number of accounts you have. For different credit profiles, how many is too many will vary depending on your overall credit picture. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.