Your Credit Explained and How It Affects Your Mortgage Rate
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Understanding your Credit Score can be a challenge and we hope that some of the information below can help
This is the info that lenders use to determine whether you will qualify for a home loan and what interest you'll pay.
Your credit score is a number based on the information in your credit file that shows how likely you are to pay a loan back on time the higher your score, the less risk you represent. The credit score that lenders use is called a FICO score. Your FICO score helps a lender determine whether you qualify for a loan and what interest rate you'll pay.
What's in Your Credit Score
Knowing what information a FICO score considers is the first step in understanding how to improve your credit health and build a better score. FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below.
Payment History
Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.) Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items), Severity of delinquency (how long past due), Amount past due on delinquent accounts or collection items, Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any),Number of past due items on file Number of accounts paid as agreed
Amounts Owed
Amount owing on accounts, Amount owing on specific types of accounts, Lack of a specific type of balance, in some cases Number of accounts with balances, Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts), Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).
Length of Credit History
Time since accounts opened, Time since accounts opened, by specific type of account, Time since account activity.
New Credit
Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account, Number of recent credit inquiries, Time since recent account opening(s), by type of account, Time since credit inquiry(s), Re-establishment of positive credit history following past payment problems.
Types of Credit Used
Number of (presence, prevalence, and recent information on) various types of accounts (credit cards,retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
Please note that:
A score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score.
The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown here are for the general population, and will be different for different credit profiles.
What's important is the mix of information, which varies from person to person, and for any one person over time.
Your FICO score only looks at information in your credit report.
However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.
Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.
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Tips for improving your credit score
Facts and Fallacies about credit
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What does the average person's credit look like
How are credit inquiries factored into FICO Scores