Credit scores or credit ratings are taken into consideration anytime you attempt to borrow money. But what does your credit score really mean? A credit score is a number representing the creditworthiness of a person, in other words, it puts a numerical value on the likelihood that the person will pay his or her debts. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers. Your credit score is a factor you need to consider if you are looking for a home mortgage loan. The major credit-rating agencies are Experian, TransUnion and Equifax. Your score can vary from one agency to the other based on the information they have on file.
What information is used to compile your score?
Your credit rating is a compilation of the information about most of your money/credit transactions. Below are some examples in each area.
Approximately 35% of your score is comprised of your Payment History such as:
- Number of credit accounts paid on time as agreed
- Number of past due accounts or items on file
- Amount of past due on accounts
- Length of time since you had past due accounts
About 30% is comprised of the Amounts Owed:
- The amount owed on each account
- Number of accounts with balances
- Proportion of credit balances used compared to total credit limits
- Proportion of installment loan amounts still owed compared to amount borrowed
Another 15% is based on Length of Credit History:
- How long have your accounts been open
- When was the last activity on each account
And finally, approximately 10% looks at New Credit:
- How many accounts have recently been opened
- Number of Credit inquiries
- How long since the last credit inquiry
- Have you re-established positive credit history since you’ve had a problem
You can see that a lot is factored into the final number and your score takes into consideration both positive and negative information found in your reports.
How does your score rate?
When it comes to getting a loan, we all want the same thing, a good rate! So how do we get that? The higher your credit score, the better rate the lender will give you. We’ll talk about some other things you can do to help lower your rate, but here are the basics to help you see where your score falls.
|Score||What does it mean?|
|720 and above||A score this high will put you in the running for the best rate available|
|680-720||Very respectable w/lenders more willing to provide a loan|
|620-680||You have some blemishes, can still get a loan but not at the best rate|
|Below 620||Will be difficult to obtain a loan without other factors, such as high down payment, low debt to income ratio, net worth, etc|
Remember that the less risk the lender is taking the better the rate you’ll get. Talk to your mortgage lender before you need a home loan and see where your score falls.
How to get a copy of your credit report and find out your score?
The Fair Credit Reporting Act requires each of the consumer reporting companies to provide you with a free copy of your credit report once every 12 months, when you request it. You can get a copy of your credit report at annualcreditreport.com. It’s the only official spam free website for this purpose. Beware, many sites out there are spam sites that gather your private information.
What can you do if your score is low?
Monitor your reports regularly and talk with your financial advisor or mortgage lender for guidance on how to bring your credit rating up. Look for errors on the reports and follow instructions to dispute the items that are inaccurate. If you’re considering buying a home in the near future, try not to apply for new credit. Again, talk with your lender and let them advise you on the best steps to take to raise your credit score.
For additional resources regarding credit reporting, visit myfico.com and creditfairy.com. To view the list of our preferred vendors and contractors, visit our @Home In Loudoun website and click our Resources tab. Give us a call if you have any questions!