HOW CREDIT SCORING WORKS
Credit scoring is a method that lenders use to assess the credit risk of a loan applicant.
The score is a number that rates your likelihood to pay back a loan. Scores range from 350 (high risk) to 950 (low risk). Depending on where you fall in that range will qualify you for different types of mortgage programs. There are a few types of credit scores; the most widely used are FICO� scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies.
Credit scores only take into account the information within in your credit profile. They do not consider your yearly income, savings, amount of your down payment, or demographics like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Both negative and positive information is taken into consideration when arriving at your credit score.
Different weight is given to different portions of your credit file Here is an example:
35% – Previous credit performance (specific to your payment history)
30% – Current level of indebtedness (current balance compared to high credit)
15% – Time credit has been in use (opening date)
15% – Types of credit available (installment loans, revolving and debit accounts)
5% – Pursuit of new credit (number of inquiries)
Paying your bills on time is the most important factor in obtaining a good credit score. Even if the debt you owe is a small, it is important that you make payments on time. In addition, keep balances low on credit cards and other “revolving credit;” apply for new credit accounts only as needed and pay down on the debt rather than continuously transferring to other accounts. Keep unused cards open, as this is a short-term strategy to improving your credit score. Owing the same amount spread among fewer accounts may help improve your score.
Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for scoring purposes for the first 30 calendar days. Multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report but the effect on your credit score will be minimal.
Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act.
Your credit report must contain at least one account, open for six months or greater, and at least one account that which has been updated in the past six months for you to obtain a credit score. This ensures that there is enough information in your report to generate an accurate score. You may need to establish a credit history before you apply for a mortgage if you do not meet the above minimum criteria. However, there are mortgage programs available using alternate credit.