Understanding your credit

Your credit score is one of the most important factors in getting a mortgage loan. A few points, in some cases, can mean the difference between getting and not getting a loan, or the difference between the best rates and higher rates. This page is intended to help you understand some of the factors that affect your credit.

First, a credit score is a numerical method of rating an individual's creditworthiness. Scores can range from approximately 300 to 800, with higher scores being lower credit risks. Fair Issac Company (FICO) developed a formula for calculating credit scores, which is used by each of the 3 major credit bureausExperian, Equifax, and TransUnion. Each of the 3 bureaus stresses different factors, so a FICO score from Experian will rarely be exactly the same as Equifax or TransUnion, but a majority of the time the scores will be similar. Because of the variation in the scores, some lenders rely solely on 1 bureaus FICO score, while others rely on the middle of the 3 scores.

Fair Isaac Company considers the scoring formula to be proprietary information, and refuses to release the exact formula for determining credit scores. However, it is generally accepted that the factors listed below are the most influential on your credit score:

1.      Payment History: This takes into account then number of late payments you have on your credit report, to all creditors you have, including mortgage, credit cards, auto loans, and sometimes even cellular phone companies.  The late payments are broken down into several categories30 days late, 60 days late, or 90+ days late.  A single late payment will not kill your credit score, but several can. A very delinquent debt (90+ days) will also negatively affect your score.

2.      Amounts Owed: This category is one of the most confusing. The total outstanding debt to all debtors considered, as well as your total available credit limits, and the number of credit lines available. In risk of oversimplifying, having a few credit lines, with low balances, is much better for your credit score than having several credit lines with high balances.

3.      Length of Credit History: This is the simplest factor. The longer you've had credit, the better. The longer your credit lines have been established, the better. The average age of all open credit lines is the major factor.

4.      New Credit: This looks at you recent history to view the number of credit lines that have been recently opened. Typically, having several recently opened credit lines lowers your score, as well as having too many inquiries on your credit.

5.      Types of Credit Use: This looks for a healthy credit mix. The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open credit accounts you don't intend to use.

 

Some things you can do to improve your credit score:

  • Keep an eye on your credit. Periodically check your credit score at sites such as AnnualCreditReport.com.Check for any inaccuracies, and notify the appropriate credit bureaus if any are on your record.
  • Have a few credit lines, with low balances. Don't max out your credit cards.
  • Don't open too many lines of credit in a short amount of time.
  • Don't try to clean up your credit by closing unused lines of credit, or opening new lines of credit. Doing so may have adverse negative affects.
  • ALWAYS PAY YOUR BILLS ON TIME! If you will be applying for a mortgage loan/refinance loan, history on your previous mortgage is critical

 

 

 

 




 

 

 

 

 

 
 

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Aaron Lending, LLC

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