Understanding Your Credit Score

Tuesday, April 24, 2012
   

A credit score is a number that describes creditworthiness, or how likely someone is to repay their debts. Lenders or creditors use this score to decide how safe it is to lend that person the money they need. These days, a good credit score affects more than just your ability to secure a home loan: your car loan, homeowner’s insurance, qualifying for credit cards and even your employment may all hinge on how “good” your score is.
 
The most widely used credit rating is the FICO score. FICO scores range between 300 and 850 points. Many mortgage loans require a minimum 620 score for borrowers to be eligible, but not all, so you should be sure to contact your lender to discuss your options, even if your score is lower than 620.
 
A higher credit score lets a lender know that you are a low risk for default on your loan as you must be managing your current loans and credit in order to earn that score. In 2011, the average credit score of borrowers in the U.S. was approximately 685. A high score may win you more favorable terms on a loan you are applying for. Lower scores indicate you may be at risk of defaulting on your loan, and it may be difficult to obtain a loan if you are on the lower end of the range.
 
The FICO credit scoring model is used by the three national credit bureaus, Equifax, Experian and TransUnion. Each agency has its own database and so your score can vary from bureau to bureau. For a mortgage loan, generally the middle score is used.
 
The components that make up your FICO score are:
 

Your credit history – 35%. Whether you make payments on time, any defaults or bankruptcies and past due amounts affect this part of your score.
 
Your credit use – 30%. The number of accounts you have open and how much you owe on each.
 
How long you’ve had your credit accounts – 15%. Having a long history of using and paying on your accounts is a positive factor on your credit.
 
Types of credit used – 10%. Having different types of credit, such as installment loans (car loans), revolving credit (credit cards) and mortgage loans and managing them properly can positively impact your FICO score.
 
New accounts – 10%. Opening and using new accounts impacts your score, although applying for lots of different credit at the same time will hurt your rating. Note that inquiries into your credit form a number of businesses of the same type in a short period – such as a mortgage lender – will not impact your credit score.
 

 


Every American is entitled to one free copy of their credit score from each of the credit reporting agencies once every 12 months. You should be sure to obtain your scores regularly, especially when you are preparing to apply for a home loan, and ensure there are no errors or inaccuracies. Each agency has an appeal process if you do find errors. Knowing your score can help you decide if you’re ready to look for a new home loan. Make sure to review your FICO early in the process of securing a home loan. Would you like to learn more about FICO scores and how they relate to loan eligibility?

We’d love to help. Please contact The Covenant Team of Service First Mortgage.  We’d happy to sit down and meet with you. 972/396-9143

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