Do You Know Your Score?

  • What is a Credit Score?
  • How do I improve my Score?
  • What are the Scoring Factors?

If you were asked to rate your credit, how would you respond? Good, fair, poor, or maybe since you have never been late on anything in your life, you would rate your credit as "excellent." While any of these answers may be correct, none of them are as important as actually knowing your true credit score.

Here's why:

Most people are unaware of the fact that lending institutions, including savings banks and mortgage lenders, are using credit scores to determine an applicant's eligibility for a loan and not necessarily their payment history.

For example, let’s assume you that you pay all of your credit cards on time each month. The fact is you may have an excellent credit history, however if you carry high credit card balances your actual credit score may be very low.

The lower your score the less likely you are to obtain a credit approval on loans for large purchases such as a home loan or mortgage.

What is a credit score?

A credit score is a statistical evaluation of a person's risk of future default. "FICO" is the most common type of scoring used in the mortgage industry. Named after the company that designed it, Fair, Isaac, and Co., FICO is a key factor used by lenders to determine the likelihood of loan repayment. The higher the score, the lower the possibility is of default on a loan. The numbers range from a low of 300 to a high above 850. It's important to note that your lender does not actually generate the score. Instead, it is part of the credit report that is generated by the three national credit information sources: Equifax, Trans Union, and Experian.

How a credit score determined:

Here's the hard part. Your credit score is determined by a number of key factors fed into a statistical model. While the factors are known, credit reporting agencies will not disclose the importance of each factor for fear that some people may try to trick the system. Below is a list of factors that will impact your credit rating (in no apparent order):

  • Number of delinquencies - This one is obvious. If you don't pay your bills on time your credit score will be reduced.
  • Number of inquiries - Whenever someone checks your credit an inquiry is reported. Frequent credit inquiries will reduce your score.
  • Balance to available debt - If your credit cards are charged close to their limits, this will have a negative effect on your credit.
  • Serious delinquencies - Recent bankruptcies, collection accounts, charge-off, judgments, etc.
  • Age (50+) - Believe it or not, age is a deciding factor.
  • Length at current address - Frequent address changes will have a negative impact on your score.
  • Job changes - Frequent changing of employment will negatively affect your credit score.
  • Career - Although unfair, some people will have a higher credit score simply due to their line of work.

While some of the factors used may not be fair, it has been proven that consumers with higher credit scores are less likely to become delinquent on loan payments.

How to protect your score:

Most people do not normally think about their credit until a loan is needed for a large purchase. Credit develops over time and so do potential credit problems. Spending (or going into debt) wisely today can benefit you tomorrow.

Some credit scoring tips:

  • Pay everything on time and in the amounts agreed upon. This is likely to be the most important factor in your score. This is something that cannot be fixed overnight-establish this good habit right away.
  • It is statistically better to have smaller balances on more cards rather than high balances (relative to your credit limits) piled on a few cards.
  • Keep tabs on your credit. Order credit reports periodically or before you apply for new credit. It is not uncommon to find an error on your report. Clear up any errors by contacting the creditor responsible. Note that this could take a bit of time so compensate by ordering your reports far in advance before applying for a loan or mortgage.

You can inquiry about and correct your report by contacting the major credit agencies directly.  The major credit reporting agencies are:

  • Equifax (800) 685-1111
  • Experian (888) 397-3742
  • Trans Union (800) 888-4213

If your goal is homeownership, have your lending partner review your credit history well in advance of your home purchase.  Often times, credit improving tips can be provided in order to raise your score prior to when you actually apply for a home loan.   That will help you to obtain the best loan rates available.  A good lending partner will offer this service free of charge

If credit is a concern, or to learn more about credit scoring, attend the next CreditFirst workshop by clicking here.