Your Credit Score and What You Should Know About It

Your credit score has the power to make or break your plans for buying that dream home. Lenders use your credit score as a way of objectively determining how much of a credit risk you are. For a number that carries so much power, many people don’t fully understand what it’s all about. Here’s everything you need to know about credit scores.

Determining factors

First of all, this scoring system takes into account only the information in your credit profile. How much money you make and have saved, how much money you put forth as a down payment, and demographic information such as your gender, race, political affiliation, health, religion, and marital status is not considered. Late payments, tax liens and bankruptcies, total amount of debt, length of time you’ve used credit, and inquires into your credit report do factor into its calculation. However, these factors do not all carry the same weight.

Payment history is considered most important as 35% of your credit score is based on this. Current indebtedness is the next most important factor with 30% of a credit score based on the ratio of current balance to credit limit. Each making up 15% of the score are two factors. The first 15% considers how long it’s been since credit was first used. The second 15% is based on the type of credit extended, whether revolving, installment, or debit accounts. The last 5% is based on how aggressively you pursue new credit. Each loan application you complete triggers an inquiry into your credit report. The more inquiries, the more aggressive your pursuit is perceived.

Because it’s common for mortgage and auto loan applicants to shop different lenders looking for the best loan terms, the basis for calculating this part of the credit score has changed in favor of applicants. All inquires do appear on the credit profile. However, inquiries from lenders serving the mortgage and the auto industries going back a full year are not factored into your score calculation for 30 days after application. Inquiries taking place during the following 2 weeks are counted as just one inquiry.

You need time to establish a credit history

You need a minimum amount of information on your credit report before a score can be calculated. You need at least one account that’s been open for a minimum of six months plus a minimum of one account update during the past six months. If you’re just beginning to use credit, you may need to put off applying for a mortgage until you have met these minimum credit history criteria.

There are several credit scoring methods. However the one most commonly used is that which was devised for each of the three major credit bureaus by Fair Isaac & Company, Inc., also known as FICO.

Your credit score is not included in your credit profile nor is it covered under the Fair Credit Reporting Act. Scores range from a low of 350 to a high of 950. Lower scores indicate an individual is a bigger credit risk than someone with a higher score. So when it comes to your credit score, the higher, the better.

Note also that your credit score can change. You can increase it by showing over time a pattern of making payments on time and not maxing out your credit cards. Likewise, the score can decrease when you don’t manage your credit wisely.

When you obtain your credit score, included will be codes representing the
reason(s) that kept your score from being higher. Lenders use these reason codes to help applicants understand their reasons for charging higher fees or worse, for denying your mortgage application altogether.