Most people know that our credit reports have a lot of information about our borrowing history. How credit worthy we are - how likely we are to pay off our debts (on time or not) - is also looked at as an indicator of how people are likely to behave in other areas.
Employers rely on credit reports to see if we'll be good employees. Landlords pull credit reports to see if we'll be reliable tenants. Auto insurers rely on credit information when deciding what sort of an insurance risk we are. But for years there's been a piece of the credit report the average consumer has been unable to see.
YOUR CREDIT RISK SCORE
The scores range from 300 to 850, with a higher score being better than a lower one. It's called a credit risk score and if you have a credit report you have a score too. Fair Isaac Company, (FICO) which is the country's pre-eminent producer of credit scoring models, uses information from your credit report, applies different weights to different pieces of that information and to the history of the information, and calculates a score for you.
When a creditor is trying to decide whether or not to give you a credit card, for example, or what rate of interest to charge on your mortgage , the FICO score is one important factor they consider in making those decisions.
DO MOST LENDERS CONSIDER THESE SCORES?
At least 75 percent of home loans are approved with help from - as they're called in the industry - FICO (Fair Isaac and Co.) risk scores. A review of the 100 largest financial institutions in the USA shows that 70 percent use FICO scores. FICO scores play a major role in the marketplace.
HOW DO AVERAGE PEOPLE SCORE?
Pretty good considering that we see bankruptcies in the headlines so often today. The average score is about 720 on a scale of 350 to 850.
Below that (720), you may have some problems applying for credit. 20% of people score below 620. Since this group includes about 50% of all people who default on their mortgages, lenders are very cautious about approving them for mortgages. The next group of scores represents another 20 percent of people who, in this instance, score between 620 and 690. A score in this 70 point range may not stop you from getting credit, but lenders are going to require greater scrutiny of applicants and may require additional assurances of ability to manage a proposed mortgage. In addition, Fannie Mae and Freddie Mac (buyers of mortgages for the secondary market) may require that lenders probe for more information to understand why there's been a problem before they agree to make a loan. On the high end, any score above 780 is considered elite. About 1-2% of borrowers score in the 800s.
There are a few factors that make a big difference in your score - let's talk about them and how you can make changes in them to improve your score:
-Your bill-paying record (This accounts for 35 percent of your score). We all know to pay bills on time. If you always have, you've done well in this category. If you slip up here and there, it can hurt your score a fair amount. The more recent the slip up, the more it hurts your score. And, as in all of these categories, a pattern of bad behavior is worse than one mistake. A string of 30-day late payments is worse than one 60-day late. (The way credit scoring works is to compare your habits to those other individuals who have proven to act in a positive or negative way overall. But there are different groups of patterns, so a seasoned user won't be compared to a new user.)
-How much you owe now (30 percent). The scoring companies look at how much you owe relative to how much credit you have available on your credit cards. The closer you are to maxing-out your cards, the lower you'll score in this area. But owing nothing doesn't prove your ability to handle credit - owing a little bit is better. For example, being at 80 percent of your limit would be viewed as very high and a negative; 60 percent in most cases is detrimental enough. Having your balances at 20 to 30 percent of your maximum is just fine.
-How long you've handled credit (15 percent). When people are trying to get their spending under control, one of the things they do - indeed that we might advise them to do - is to make sure they don't have too many tempting cards in their wallet. But, when it comes to your credit score, you may not want to cut up that one card you've had the longest. Then the credit scoring companies lose the ability to see just how long you've been managing credit. It may be better to keep that old card even if it's at a high interest rate, use it a couple times a year and pay it off completely rather than cutting it up.
-Mix of credit (10 percent): It's good to show that you can manage different kinds of credit. So having an installment loan (on a home or a car) as well as having a revolving credit account (credit card) is a positive.
-Pursuit of new credit (10 percent): The media often exaggerate how much searching for new credit can hurt you. That's because, a few years ago, the scorer's methodology was changed to reflect the idea that it was OK - indeed smart - to be shopping around for a loan. So all of your inquiries into a mortgage over a 30-day period now count as one. That said, if you have real credit problems and you're constantly shopping around for new cards or loans, it's going to hurt your score. Moderation is key. If you're out looking for new credit every month, it's a minus. Less frequently than that, you'll probably be okay.
Now that you have this information, you can use it to improve your credit overall. When you receive your report, you can use it to negotiate with lenders in a preliminary way. You could approach a mortgage broker and say,"This is my score, will it be easy for me to get a mortgage?" If you buy your FICO score, you'll also get a guide to understanding the report and the top four factors that contributed to establishing your score. Having reviewed your report and scores, if you need to, you can work to improve your score before you apply for credit
. Give yourself three to six months to get it in shape.If you run a Web search for "free credit score," you'll most likely come up with a number of America’s Lending Partners’ free loan request service will match you with up to four lenders to help you mortgage lenders and banks who may be willing to give your score to you. In some cases, you may have to actually apply for a loan. In other cases, giving them an e-mail address and phone number (so that they can market to you later, one assumes) seems to be sufficient. So if you're willing to give up some personal information, you can get your score for no money. Or you can pay the $ 9 - $13 to the credit reporting agencies and receive your scores. (Even if you're not up for checking your score, you should check your credit report about once a year. If there are problems, you should check all three of the credit bureaus.)
About the author:
John Prentice is a Credit Expert in the Mortgage Industry. John provides credit score repair information and a Credit, Finance & Mortgage newsletter at his web site: http://www.AccelerateMyCredit.com
Article Source: http://www.Free-Articles-Zone.com
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