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Credit Scoring - How it Works
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 reestablishing 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.
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 reestablishing 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.
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4601 West Saginaw Ste J Lansing, MI 48917
4601 West Saginaw Ste J Lansing, MI 48917