What Your Credit Score Means
Your credit score is essentially a standardized way for lenders to determine how risky it is to lend you money. The better the score, the lower the risk. The lower the risk, the lower your interest rate. In order to get the most favorable rate on your mortgage, you will want to have the best credit score possible.
How Your Credit Score Is Determined
Your credit score is formally known as a Fair Isaac Corporation Score (commonly called the FICO® score). It ranges from 300 to 850 and is calculated according to the following risk factors:
Payment History (35% of score)
- Payment information on several types of accounts
- Public record and collection items
- Details on late or missed payments – specifically:
- How late they were
- How much was owed
- How recently they occurred
- How many there are
Amounts Owed (30% of score)
- Amount owed on all accounts
- Amount owed on different types of accounts
- Whether you are showing a balance on certain types of accounts
- How much of the total credit line is being used
- How much of installment loan accounts is still owed
Length of Credit History (15% of score)
- How long your credit accounts have been established, in general
- How long specific credit accounts have been established
- How long it has been since you used certain accounts
- New Credit & Inquiries (10% of score)
How many new accounts you have
- How long it has been since you opened a new account
- How many recent requests for credit you have
Types of Credit (10% of score)
- What kinds of credit accounts you have and how many of each
- Total number of accounts you have
How You Can Improve Your Credit Score
If your credit score is keeping you from getting a better mortgage rate, here are a few things you can do to clean up your credit history.
Obtain a complete copy of your credit report from the three leading reporting agencies:
- Experian
http://www.experian.com
1-888-3997-3742 - Equifax
http://www.equifax.com
1-800-685-1111 - Transunion
http://www.transunion.com
1-800-888-4213
- If you encounter errors, you should write out exactly what should be corrected and why. You are able to add 100 words or less to reports on questioned items.
- You can also find assistance through credit counselors, who are available through the various credit bureaus.
Federal law requires credit bureaus to contact all creditors on items where mistakes were made. According to the Fair Credit Reporting Act of 1971, if these firms fail to respond to you in writing within 30 days, they are obligated to remove the disputed items from your records.
The Fair Isaac Resolution Resources Helpline is 1-800-777-2066.
Most merchants are willing to negotiate customized repayment plans for those that find themselves with considerable debt.
Chapter 13 bankruptcies stay on an individual's record for 7 years.
Chapter 7 bankruptcies stay on an individual's record for 10 years.
Judgments, Garnishments or Liens
Liens, garnishments and judgments are typically indicators of an unstable borrower. Any judgments, garnishments or liens must be paid in full. Prior to closing, proof that the judgment, garnishment or lien has been cleared must be obtained; this can be reflected through a clear credit report supplement or a paid receipt form from the creditor. IRS tax liens also must be paid in full. Standard property tax liens do not have to be recorded as paid in full since they are not yet due or payable. Also, the borrower is obligated to provide a satisfactory letter of explanation.
Delinquent Child Support
Any outstanding child support payments must be brought current, and specific documentation from the credit-reporting agency stating this fact must be in the file with no exceptions. Because of the seriousness of the delinquency/default, which in many states can cause incarceration, a letter from the court or the legal authority responsible for collection in the city/state (e.g. district attorney, sheriff, etc.) is acceptable. A letter from an ex-spouse and copies of personal checks are not acceptable, nor is an agreed-upon, but not yet completed, payment plan.
Credit is the most well known of these three categories, and the least understood. A credit report covers many of your interactions with the world — and not just your credit use. It contains your address history, job history, date of birth, and social security number. It also has details about the credit you’ve been granted, whether open or closed and any public records that may exist. And your credit scores.
Credit scoring came about when a company, Fair Isaac, analyzed consumer credit data to predict an individual’s likelihood of making a 90-day late payment in the future. Two more companies, Experian and Equifax, started using data this way, and soon it was fully adopted into mortgage underwriting. Each of these companies, or Credit Bureaus, translated their prediction into a number score, known as the credit score.
With evolving technology and government regulations, the information collected and compiled in a credit report has expanded. Your borrowing history shows outstanding balances on any credit you have, including credit cards, auto loans/leases, any other installment loans, mortgages or equity lines of credit. Judgments or tax liens show in a public records section, and derogatory credit (late or non-payments) from the previous 7-10 years is listed.
The underwriter looks at items on your credit report to learn how you manage credit. Late and non-payments are reviewed for a pattern – how long ago and how often did they occur? Do you make minimum payments on your debt or large payments? Do you borrow a lot of credit at one time? Do you use credit enough or at all? Why are these important?
Late or non-payments show the underwriter you don’t stick to the repayment terms you agree to when you’re granted credit.
Large balances and making minimum payments might indicate you’re struggling to keep up with the debt you have and won’t be able to make the payments on any more debt. If you’re not using credit enough, or at all, the underwriter can’t assess how you handle debt. That makes it hard to approve your mortgage request.
Recently, the bureaus added more details on spending and payment history to credit reports. Individual accounts now show monthly balances over several years giving the underwriter more than a ‘snapshot in time’ of your credit use. For example, a credit card with a zero balance, but showing a recent history of high balances for several months, gives the underwriter a better picture of how much credit you typically use.
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