Credit Scores - What You Should Know

Checked your credit score lately?  No, then perhaps you should.    You will be applying for a mortgage in the near future, which will enable you to complete your lease purchase contract.   Your credit score is the most important factor in determining your eligibility, and obtaining a mortgage.  It will determine the interest rate you will receive on your loan, thus the higher your score, the lower and more favorable your interest rate. Let's take a look at what goes into this all important score.

The credit score, usually referred to as the FICO score, is a number based on a formula developed by the Fair Isaac Corporation.    Fair Isaac looks at a summary of all of your credit accounts (mortgage, credit cards, car payments, etc.) and your payment history. By using these summaries and how you have paid, Fair Isaac can calculate the probability of how you will repay future debt.  These probabilities (scores) are given numerical assignments ranging from 300 to 850.  The higher your score the less of a risk you are to a creditor.  For the best rates, a score of 700 or above is desirable. Fair Isaac calculates the score for each of the three big credit-reporting agencies Equifax Experian and TransUnion, using the information supplied by each agency, thus sometimes you will note a slight difference  in the reporting scores. 

How is your score determined?

35% is determined by your payment history. Do you pay your bills on time on a regular basis to any agency that reports to the credit bureaus?     This can include medical bills, fines, parking tickets.

30% is based on the amounts you owe each creditor, and how that compares to total amount of credit available to you.  The same applies to any loans that you owe.  In other words, do not max out your credit cards.

15% is based on the length of the credit history.  How long you have had these accounts and how long it has been since you have had any activity on these accounts.   The older accounts are better as long as you have made timely payments.

10% is based on how many accounts you've recently opened compared with the total number of your accounts.   Also the number or recent inquires on your report by lenders to whom you were applying for credit.   This will lower your score. Too many inquires may signal you are in financial trouble.  If you are searching for a mortgage or car loan, inquires made within a 6 week period should not adversely affect your score.  "But every inquiry you trigger when you apply for a credit card can affect your score," says Craig Watts, a spokesman for Fair Isaac.

10% is based upon the type of credit you use.  An installment loan like your mortgage which has a fixed monthly amount and demonstrates you can handle large debt.  Your handling of revolving debt carries more weight since the payments change from month to month and seems to be predictive of your future behavior.  It is advisable to pay off these cards each month and keep a low balance.

Part Two of Credit Scores: Improving and Monitoring Your Credit Score, coming in the April edition of the Purchase Review 

Contact: Sjackson@ktrealty.com   or call 770-551-5850

All information believed to be accurate but not warranted, offer subject to errors, changes, omission, prior sales and withdrawals without notice