www CreditScore

 

Credit Score - What is It?

What is this credit score thing anyway? Basically, a credit score is a number derived from a statistical analysis of your credit report (credit report is defined later). Huh? In layman’s terms, a company called Fair Isaac Corporation, or FICO® for short, developed a program that looks at everything on you credit report, both positive and negative, to determine the likelihood that you will repay your debts in full and on time. There are other companies that perform similar analysis, but Fair Isaac is the most widely known and used.

The exact components that go into this analysis are not know, but according to Fair Isaac, they use five categories to determine your score. These categories, and the corresponding weight given to each category are:

  1. 35% - Payment History
  2. 30% - Amounts Owed
  3. 15% - Length of Credit History
  4. 10% - New Credit
  5. 10% - Types of Credit Used

You might be asking yourself, how can Fair Isaac determine how likely I am to repay my debts based on this information. The answer is that credit reports have been in use for many years. Consequently, there is a large data base of information available from which Fair Isaac can analyze the past performance of borrowers to create models to predict the future performance of borrowers. They compare the components of your credit report to these predictive models and assign a number (a.k.a credit score) based on this comparison. The higher your likelihood of repayment , according to their statistical model, the higher your FICO® score will be (FICO® score and credit score are used almost interchangeably and today having the same meaning). Conversely, the lower you likelihood of repayment, the lower your credit score will be (the consequences of a high or low credit score will be covered in another article. Keep watch for it, you’ll want to read it).

Scores can range from 300 to 850. At the time of this writing, the median score (half the scores are above this point and half are below) in America is approximately 720. The average score is about 680. These numbers of course, can change over time. Other statistics from Fair Isaac include:

FICO Range (percent of the population)

  • 300-499 (2%)
  • 500-549 (5%)
  • 550-599 (8%)
  • 600-649 (12%)
  • 650-699 (15%)
  • 700-749 (18%)
  • 750-799 (27%)
  • 800-850 (13%)

Most everyone knows what a credit report is, but let’s review anyway. A credit report is a historical record (looking back seven years or longer) of your borrowing patterns. Included in this record are items such as

  • Level of borrowings and how well you repaid those loans. This information includes not only the amount that you are currently borrowing, but also the total amount that you could borrow , as in the case of a credit card or Home Equity Line of Credit.
  • Credit inquiries. This means that every time you apply for credit, you give the lender the right to review your credit report. These credit checks, or inquiries, are recorded whether credit is granted or not. This is most likely tracked so that lenders can look for unusual request patterns or recent changes in your life that make the rest of your credit report less reliable as a predictive tool. For example, if have you had a high number of inquiries in the last month, why? Has there been some catastrophic event (i.e. job loss) in your life that requires further investigation. You could have had perfect credit up to that point , but if you lost your job, obviously, you will have less income available for the repayment of debt. New credit is reviewed for similar reasons.
  • Other items such as your date of birth, address, employment information, your address, and your social security number. This information is not used to determine your credit score, but rather to identify you.

Now that you know what is on your credit report, let’s determine what is not on your credit report:

  • Race, Color, National Origin, Sex, Marital Status, Religion
  • Age
  • Salary or occupation
  • Interest rate on any loan (now or in the past)
  • Child or family support obligations

So, as you can see, many things are contained in your credit report. Because your credit report is the basis for your credit score, and your credit score is used in so many aspects of your life today, it is very important to ensure that you review your credit report and correct any errors (how to correct errors is a topic that will also be cover in a latter article). So important is your credit report, in fact, that Congress passed a law that allows you to receive a free copy of your credit report every 12 months. To obtain your free credit report, go to:

https://www.annualcreditreport.com/cra/order

Thanks for taking the time to read this article, I hope you found it useful. I invite you to review the following blog for more helpful information: http://HomeFinancialHelp.blogspot.com for information and resources on a variety of different personal financial topics. Jeff Gilbert is a 16 year veteran of the banking industry.

 

Your Credit - Know the Score!

When you decide you want to buy a house, what’s the first thing you should do? If your answer is “go house hunting,” that’s definitely the wrong answer. The right one? Find out what your credit report says about you. And what your credit score is. The worst possible case is that, without good credit, you may never qualify for a mortgage. A scenario almost as bad is that you could get a mortgage-but the mortgage payments and the interest rates would be outrageously high-so you could well be making your financial situation go from bad to worse.

Let’s get down to the basics: what exactly is a credit report and a credit score?

If you want to understand the history of credit reporting, go to a website called http://www.howstuffworks.com and you’ll get a detailed explanation of how it got started way back when there were old-time general stores. The website will then tell you where it went from there. But if you’re interested in how things work today, you only have to go back to the 1980’s. That’s when credit scores came into wide use. Lenders standardized three basic decision processes by using a point system that scored several factors on a consumer’s credit report. Statistical models were then developed that measured the variables in even more detail. So now a system exists that measures your “credit-worthiness.”

And pretty much everyone-including retailers, credit card companies, and mortgage lenders-uses it. Mortgage lenders, in particular, use your credit report as the first in a list of reasons to qualify or disqualify you as a borrower. It also determines which lending products and programs they are able to provide to a borrower. If you want a more detailed understanding about credit reports and credit scores, another website called www.truecredit.com can be very helpful and informative.
Do we have a totally fair and accurate credit reporting and scoring system?

The answer is both yes and no. Yes, because it takes personal or individual bias out of the decision. And no, because it’s based on mathematical models where the variables change every day. For example, there might be too much weight put on a financial event that happened recently-but not enough placed on years of good credit history. And one model, for instance, may conclude that you’re a good risk for something like a car loan-but not for a home mortgage. Another thing you need to be aware of is that the accuracy of your credit information might be questionable because the process of checking the information is an imperfect one. So now that you know about the possible pitfalls-and if you’re a wise consumer-you’ll understand how important it can be to check your credit at least once every year. Because if your credit report is incorrect or incomplete, it’s your responsibility to correct it-and that can sometimes be a long and frustrating process. But imperfect though it may be, it’s all we’ve got. So you have to deal with it “as is.”

There are three national credit bureaus that provide credit reports.

Here’s how to contact them:

Experian
1-888-397-3742

Equifax
1-800-685-1111

TransUnion
1-800-916-8800

Normally, you will have to pay a fee to get your credit report. However, once a year, Texans may order a free copy of their credit reports from these credit bureaus at www.annualcreditreport.com.

What kind of information about you impacts your credit report and score?

• How many late payments you’ve made, and how late they were.
• The type, number, and how long you’ve had the accounts.
• Your total amount of debt.
• How many recent inquiries or applications you’ve made
(to get credit card accounts, for instance.)

Here’s what is not taken into consideration in your credit report or score:

• Bank account balances.
• Race
• Religion
• Health (unless medical bills show up as debts)
• Criminal records (unless public filings and judgments appear)
• Income
• Driving records

Are you a high or low scorer?

Get your FICO credit score at myfico.com to find out. If yours is below 680 and you’re trying to get a mortgage, shop for a mortgage broker that works with a re-scorer. By the way, the fastest way to improve a not-so-hot score is to pay off any large credit card accounts and then ask for a re-score.

What does your score indicate?

The higher it is, the better. Credit scores usually range from 400 on the low end to 800 on the high end. Here’s how a mortgage lender would interpret your score:

720 and over-you are a mortgage lender’s dream.
You’ll get the best rates and terms on your mortgage.

700 to 719-you’re in excellent shape. You will have
no problem getting a mortgage.

680 to 699-you’re going to do fine, mortgage-wise.

660 to 679-you’re okay.

640 to 659-you’re on the borderline. It would help if
everything else in your financial picture is strong.

620 to 639-You are in a weak position. The rest of
your financial picture must be perfect.

600 to 619-you’re in a difficult position. You will
probably need to improve your financial situation, or
maybe try to find a special program in order to get a
mortgage.

Below 600-you’re in trouble. You will absolutely
have to work on your credit picture.

If you are married, will your credit report and score be the same as that of your spouse?

No. Here’s why. You are separate individuals, with separate Social Security numbers. So you will have six credit scores (3 per individual, per major credit bureau.) Which means that if you plan to get a mortgage and buy a home together, and one spouse has a poor or bad credit rating and score, it could definitely affect your chances as a couple of getting a mortgage.

So-now that you know the score, are you ready to aim at a mortgage? Great! Welcome to getting your sights on the American Dream. It’s a really worthy target.

Find new homes for sale in the Rio Grande Valley & South Texas online at iNewHomeSearch.com by the area’s leading builders featured in the Rio Grande Valley New Homes Guide