What’s Your Credit Score?
Unless you have the available cash, you will be financing your real estate purchase. That means applying and qualifying for a mortgage loan. In doing so, you will undoubtedly be faced with the realities of your credit score. But what is a credit score and what part does it play in your mortgage loan process? Here are the answers to these and other frequently asked questions about credit scores.
What is a
credit score?
Whether you realize it or not, you have a credit score. Your score is a summary of your credit data expressed in the form of a three-digit number. That number essentially represents your credit rating. You might hear your credit score referred to as your FICO® score. This is because the computer model most commonly used as a basis to compute credit scores was developed by Fair Isaac Corporation, a company that provides analytic solutions, such as predictive models, that automate and improve decision strategies. Generic FICO® scores range from 300 to 850. In general, the higher your score, the lower risk you represent to lenders in terms of paying back your loan. On the reverse side, the lower your score, the greater credit risk you are assumed to be.
How are credit scores computed?
Your credit score is the result of a sophisticated statistical analysis on the information in your credit report. Data elements drawn from your credit file are plugged into mathematical formulas that calculate your score. Those formulas and your score also take into account how your information compares to the credit track record of thousands, sometimes even millions, of other consumers with similar credit profiles.
According to Fair Isaac, the data that is used in the calculation of your credit score can be grouped into five categories. These categories are not equally important in the scoring process. Each is assigned a weight based on how strong a predictor it is of credit risk. These categories are presented below in order from greatest to least in terms of weight, with the first two categories being the most heavily weighted.
- Payment History
- Amounts Owed
- Length of Credit History
- New Credit
- Types of Credit Used
Each of the
three major U.S. credit bureaus
calculate credit scores.
They use credit scoring software
to do so. Even though each
bureau has its own system and
calculations, the statistical
scoring models they use have
been standardized so that the
scores from each bureau are
comparable.
How do credit scores affect mortgage loans?
Mortgage lenders recognize
that there is a correlation
between credit scores and risk
of delinquency or default on
mortgage loans. They
therefore use credit scores to
help them determine eligibility
of borrowers as well as terms
offered on the loan.
Credit scores are not usually
the sole determinant for
approval or rejection, however
they are a very important factor
in that decision. If the
mortgage loan is approved,
credit scores can also impact
the interest rate offered.
Generally speaking the higher
the credit risk, the higher the
interest rates.
Does everyone have a credit score?
Not necessarily. Some consumers may not have enough information, or enough recent information, in their credit report for scoring models to generate an accurate score. Thus, if you have little or no credit history, you probably will not have a credit score.
Does your credit score change over time?
Yes it does. Your credit
score is not a static number.
Rather it is a fluid value that
adjusts up or down based on the
data that is in your credit file
when your score is calculated.
Since your credit data is
continually updated as creditors
provide new information based on
your activity, your score
changes to reflect that
underlying information.
How much your score changes will
depend on your activity during
that given time. If you
are consistent in your credit
behavior, your score will remain
relatively stable. You are
more likely to see a bigger
change if you significantly
modify your behavior.
How do you find out your credit score?
There is a fee associated with getting your credit score. You can access that information through each of the three national credit bureaus or the central credit report site sponsored by all three bureaus:
You can also purchase information on all three of your credit scores through
www.myFICO.com, a division of Fair Isaac. This site also has a credit education section that provides additional detailed information about understanding and managing your credit score.
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