Credit Scoring

Much like your SAT scores have a significant effect on which college you get into, your credit scores will play a big role in determining if you get approved for a mortgage and what type of interest rate or extra cost you may pay on your loan. Lenders price loans based on risk factors; every time you add another layer of risk you  lower your credit score and overall pricing will increase. Having a low credit score may not only cost you thousands over the life of your loan but even to the point of falling out of qualification.  

Credit scores are reported from three major credit reporting agencies, Equifax, Transunion, and Experian. A mortgage inquire, also known as a hard hit will produce a tri merged credit report with information from all three agencies. Each score may be slightly different so your lender will take the middle of the three to be most accurate.  

Credit scores can range between a low score of 300 to a high score of 850. Credit standards have tightened on all levels since the industry meltdown. The standard for what used to be considered good credit has changed in eyes of a lender.   

  • 850 – 760        Excellent
  • 759 – 720        Good 
  • 719 – 680        Above Average
  • 679 – 620        Average
  • 619 – 580        Poor
  • 579 – 300        Bad

   

   

The Five Factors of Credit Scoring  

  

  

Payment History – 35% Impact
Making on time payments will have the greatest impact. Late payments, judgments and charge-offs will impact your score negatively. Delinquencies that have occurred in the last two years carry a greater impact.  

Outstanding Credit Card Balances – 30% Impact
The ratio between your outstanding balance and available credit will have the next largest effect. Ideally you should try and keep this ratio on your revolving debt no more then 30% of your max balance and as close to zero as possible. You do not need more then 2-3 major credit cards.  

Credit History – 10% Impact
The length of time you have had since you have established a particular credit line; the longer the history greater the impact.  

Type of Credit – 10% Impact
Home mortgages and auto loans will have a great impact then personal loans and credit card debt. You want to make sure to have a good mixture of all types  

New Credit – 10% Impact
Number of recently opened accounts, recent credit inquires and time between each enquire.  

What if you have no credit?

On occasion, a borrower will not have established credit for a number of reasons like being new to the country or just turned eighteen years old. Regardless your first step should be to open a checking & savings account. Once you have established a history and maintained a certain balance you can ask your bank or credit union to issue you a secured line of credit. You should also try and establish small line of credit from retailers. These few easy steps will allow you to start building credit. The rest will take time and a consistent payment history.

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