What is a credit score?

Credit score is a number lenders use to rate your credit worthiness. It is used to predict how likely an individual is to repay a new loan based on experience with millions of consumers. There are many different computer models that can calculate a credit score. In general, however, the computer model assigns points to information in a credit report. For example, making payments on time every month is positive for the score. Charging the maximum amount available on a credit card is negative. The computer adds the positive and negative points, and the resulting number is a credit score. Credit scores have proven over time to be a reliable indicator of whether or not a consumer would repay a loan.

Scores also fluctuate depending on credit activity. Since credit bureaus only calculate your score at the lender's request, it will be based on the information in your file at that particular credit bureau, at that particular time only.

What factors are considered in your score?

The following are just a few exmaples:

Current balances on accounts

Accounts showing all payments were on time are positive.

Length of time accounts established

Long-established accounts are positive

Bank revolving accounts

Lack of accounts, or too many can be negative.

Reported delinquencies

Negative, especially if severe and recent.

Number of accounts with balances

Too many credit card accounts may have a negative effect on your score.

Number of finance company accounts

Loans from finance companies may negatively affect your credit score

Recent payment history

An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances

Proportion of balance to your credit limit

If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score

Number of recent inquiries

Not all inquiries are counted. Inquiries by you, or creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.

No recent (non-mortgage) account balance information

Can be negative when seeking mortgage loans

Legal item filed or collection item reported

Negative, effect decreases with time.

Accounts not paid as agreed and/or legal item filed

Your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy

Employment and residency

Longer time in your job and at your residence can help your score.

 

How much weight each of these factors has on your score is not disclosed to consumers because it causes more confusion than insight into the credit scoring process. Everything in credit scoring is relative -- one negative item can have a small or large impact on your score depending on your credit history. If you have a long and seasoned history of credit and many established accounts,one late payment would have a small impact on your score. However, if you have a short credit history,one late payment would impact your credit history much more. If you have no established credit, you will have no score. Credit scoring requires that you have at least one account that is older than six months and have at least one account that has been reported to the credit bureau in the last six months (this could be the same account).

Your score should be affected less if you have late payments on minor credit lines versus major ones. For example,if you are delinquent on a gas or department store account,and not on a mortgage or auto loan,your score should not be affected as much as it would if you are delinquent on an auto loan. Your credit score should be stronger with credit cards than mortgages since statistics show that credit cards are more indicative of paying on a loan than a mortgage is (most people will pay on their mortgage no matter what,and let credit card payments slide).Paying on a secured card should affect your score more than payments on department store cards.

A typical scoring model may also consider your job or profession for stability, and how long you've lived at your address.

What is a "GOOD" credit score?

That depends on the credit-scoring model and the lender. For example, one computer model ranges scores from 300 to 900; the higher the number, the better. In addition,each creditor decides what credit score range it considers to be a good risk or a poor risk. For this reason,the creditor is the best source to explain what your credit score means in relation to the final credit decision.

How can I improve my credit score?

If a creditor has told you that you have a poor credit score and has turned you down for credit because of your score, there are steps you can take. First, you have the right to request a written explanation from the lender that turned you down. The letter must explain the reasons for the credit denial. Then you can make a plan to begin to address these issues. As you improve your credit over time, your credit score will also improve.

To improve your credit score, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.

For more information, see "How To Improve Your Credit Score" page.

FICO: the most commonly used credit score

There are other credit bureau scores, although FICO scores are by far the most commonly used. A FICO score is the method that many lenders use to determine whether to accept or reject your mortgage application as well as setting fees and rates.

Also informative is the list of "reasons" that may be provided to account for why a score isn't higher. When lenders request your credit score, they also receive a list of the four most significant reasons your score is not higher. Although lenders do not have to tell you your score, they should share the reasons listed on the report with you.

For more information about FICO score, see the FICO Score page.

Check Your FICO Score

For years now, customers have been barred from ever seeing their FICO
scores and the method whereby their FICO scores were obtained. But after many years of pressure by consumers and legislators, now you will not only be able to obtain your FICO score from your loan officer, but you will also be able to go on-line and find out the specific factors that are affecting your score. Order your FICO Score by clicking HERE.

Reminder

Remember that the lender, not a credit score, makes the final decision to approve a mortgage loan application. A credit score is simply a tool used by the lender. The lender may take into consideration any special reasons for your past credit problems. In addition,the lender will look at more than just your credit score such as your equity investment in the home, job history, income, savings, and the type of mortgage loan you want -- before making a final decision.