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What is Credit Scoring?

Credit scoring is a quick, accurate and consistent scientific method of assessing credit risk. The scores are based on data about an applicant's credit history and payment patterns stored in a credit bureau's file on that applicant. Statistical models assign points to factors indicative of repayment calculate credit scores. The resulting score sums up what the applicant's past payment performance and current usage say about the perspective applicant's level of credit risk.

Credit scoring moves the underwriting process from a subjective system of assessing risk to an objective one. Because the score is a composite of all of the applicant's credit information, no single factor – like a bankruptcy, inquiry or late payment – will be the sole cause of an unacceptable score.

A score may range from 300-850. Each score along the range is indicative of a different set of odds for satisfactory repayment of the credit obligation. Credit scores fall into the ranges shown below, and scores in the top two ranges garner the best rates and loan terms from lenders.

Scoring models do not consider race, gender, religion, marital status, income, nationality, address, employment, position or title, length of employment, sexual preference, or interest rate being charged on a particular credit card.

Scoring models do analyze all the credit information stored in a bureau's credit file on an applicant at the time of the request.

Factors that Affect Credit Scores:

  • Past Payment Performance (35% of the scoring weight)
  • Credit Utilization (30% of the scoring weight)
  • Credit History (15% of the scoring weight)
  • Types of Credit In Use (10% of scoring weight)
  • Inquiries - New Applications for Credit (10% of the scoring weight)

Factors that Affect Credit Scores:

  • Past Payment Performance (35% of the scoring weight)
  • Credit Utilization (30% of the scoring weight)
  • Credit History (15% of the scoring weight)
  • Types of Credit In Use (10% of scoring weight)
  • Inquiries - New Applications for Credit (10% of the scoring weight)

How To Improve an Your Credit Score

Credit scores automatically improve as your overall credit picture gets better. Although there is no quick fix, there are a few things to remember:

  • Pay down revolving credit card debt to below 30% of the available maximum balance.
  • Do not close accounts unless the reason code indicates that there are too many revolving accounts and all of the accounts have little or no balances.
  • Do not consolidate debt onto one or two cards and close other cards, or lower their existing credit limit as their outstanding balance declines. That may artificially skew the appearance of your credit utilization.
  • Review the credit information in your file for accuracy, whether good or bad. Entries that have “maxed out” balances, even with no late payments, represent higher risk.

Things to Remember About Credit

  • Get your credit report a few months before you plan to buy a house so you have time to correct any errors before applying for a mortgage.
  • Find out your credit score and review the information that comes with it.
  • The last 2 years count most. Your credit score looks most closely at the last 2 years.
  • Your credit tracks your payment history over the last 7 years.
  • Don’t shop for a mortgage for more than a 2 or 3 week period. When you apply for a mortgage, the lender requests your credit report and an inquiry of that request shows up on the report. All inquiries during a 2-week period only show as one inquiry. A couple of inquiries on your credit report are okay, but more can lower your credit score.
  • Don't apply for new credit or make major purchases, such as a new car, right before you apply for a mortgage.

 




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