Credit
scoring is a statistical method that lenders use to quickly and
objectively assess the credit risk of a loan applicant. The score
is a number that rates the likelihood you will pay back a loan.
Scores range from 350 (high risk) to 950 (low risk). 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 consider the information contained in your
credit profile. They do not consider your income, savings, down
payment amount, or demographic factors 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. 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 score.
Different portions of
your credit file are given different weights. They are:
• 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)
The most important factor for a good credit score is paying your
bills on time. Even if the debt you owe is a small amount, it is
crucial that you make payments on time. In addition, you may want
to: keep balances low on credit cards and other "revolving
credit;" apply for and open new credit accounts only as needed;
and pay off debt rather than moving it around. Also don't close
unused cards as a short-term strategy to raise your score. Owing
the same amount but having fewer open accounts may lower 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; then, multiple inquiries
within the next 14 days are counted as one. Each inquiry will
still appear on the credit report.
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 which has
been open for six months or greater, and at least one account that
has been updated in the past six months for you to get a credit
score. This ensures that there is enough information in your
report to generate an accurate score. If you do not meet the
minimum criteria for getting a score, you may need to establish a
credit history prior to applying for a mortgage.
By law
you can order your credit reports at least once a year for FREE.
This will allow you to see exactly what's being reported about you
by the credit bureaus.
EQUIFAX INFORMATION SERVICES, LLC
P.O. Box 740256
Atlanta, GA 30374
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TRANS-UNION, LLC
Post Office Box 2000
Chester, PA 19022
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EXPERIAN INFORMATION SOLUTIONS, INC.
National Consumer Assistance Center
P.O. Box 2104
Allen, TX 75103
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