Credit Scoring and Your Credit Report

Scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. The score is a number that rates the likelihood you will pay back a loan. . Scores range from 200 (high risk) to 850 (low risk). There are a few types of credit scores.

The most widely used are FICO scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies/bureaus.

What Affects Your Credit Score?

The scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount or other factors like gender, race, nationality or marital status.

Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report.

Late payments will lower your score. To raise your score you need to establish or re-establish a good track record of making payments on time.

What Weighs Heaviest on Your Credit Report

• 35% - Previous credit activity (your payment history)
• 30% - Current level of indebtedness (your current balances compared to high credit)
• 15% - Time credit has been in use (when you opened the account)
• 15% - Types of credit available (installment loans, revolving and debit accounts)
• 5% - Trying to obtain new credit (number of inquiries)

Apply for and open new credit accounts only as needed. Pay off bills rather than moving the debt around. Don't close unused cards as a short term strategy to raise your score. This may actually lower your score. Owing the same amount but having fewer open accounts can lower your score.

Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. For example, if there is an inquiry originated by a consumer within the past 365 days from a mortgage or car loan, these inquiries are not considered for scoring purchases for the first 30 calendar days. Then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.

Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. These codes can help a lender describe the reasons for a higher than expected rate or loan denial.

They only consider the information contained in your credit profile and are not covered by the Fair Credit Reporting Act.

What Establishes Credit?

Your credit report must contain at least one account which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score.

Perhaps you do not meet the minimum criteria for getting a score. Then you may need to establish a credit history before applying for a mortgage.

Want to know where this scoring has ranked you? .

Get Your Free Credit Scores by learning how to get your free credit report.

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