Understanding your Credit Score
In the mortgage lending world, credit scores either make or break you when it comes to obtaining a home mortgage or getting the best interest rate. This is the “mortgage rating” system used to get a mortgage from conventional and non- conventional lenders. The better your credit, the higher your score will be. In some instances, lack of credit results in “no score” on your credit report requiring you to provide “alternate credit” via your rental, utility, phone, insurance and buy-here-pay payment histories.
It is imperative that you get a copy of your credit report and check it for inaccuracies. It has been reported that 25% of all credit reports are inaccurate. Something could be bringing your score down that you are unaware of.
Credit Scoring
Credit Scoring is a mathematical indicator of possible future financial events, reflected in a point value. It was developed in the 60’s at Stanford University. It has been used in the credit card and auto industry for decades but has only been used in the mortgage industry since the mid 90’s.
Credit Score Points range from 350 to 850
There are 3 credit scoring models:
Equifax – Beacon / Trans Union – Empirica / Experian – Fair issac (FICO)
What goes into a Credit Score? Number of bankcard trade lines – Number of finance/mortgage/loan trade lines – Number of months in file – Number of months since most recent bankcard opening – Number of months since the most recent derogatory credit – Number of months since the most recent derogatory public record. Additionally, your score is affected by Delinquency, Overextended amounts or usage, Lack of sufficient credit accounts, Sources of financing, and applications for credit.
There are 4 Buckets to Credit Scoring
| Payment History | Available/Usage | Credit History | Inquiries/New Accounts |
 |
 |
 |
 |
| 35+% | 30 – 35% | 10 – 15% | 10+% |
| Public record and collection items. | Number of balances recently reported. | Age of oldest trade line | Number of inquiries and new account openings in the last year. |
| Severity, recentness and frequency of delinquencies. | Average balance across all trade lines. Relationship between total balances and total credited limits on revolving trade lines. | Amount of time since most recent inquiry. |
How Credit Use Effects Score
Payment History: 30 –day late in last 12 months can lower score 70 – 100 points.
Credit Utilization: Lower balances on more credit cards is better than high balances on a few – Optimum 30 – 35% of credit limit.
Steps for Improving Credit Scores
1. Payoff / Pay Down Existing Debt 2. Don’t Seek New Credit
3. Pay Your Bills on Time