In today's increasingly automated society, it should come as no surprise that when you apply for a mortgage, your ability to pay can be reduced to a single number. All the years you've been paying your mortgage, car payments, and credit card bills can be analyzed, sliced, diced, spindled & mutilated into a single indicator of whether you're likely to meet your future obligations.
All three of the major credit reporting agencies (Equifax, Experian & TransUnion) use a slightly different system to arrive at a score. The best known is called the FICO score, based on a model developed by Fair Isaac & Company. FICO credit scores range from 300 to 850. Anything above 760 is the most desirable. Some things to know to keep scores good are: Ideally, credit experts say, you never want your balance to exceed 30% of your credit limit. Paying off your balances every month is desirable.
Primary factors include:
- Credit History - How long have you had credit?
- Payment History - Do you pay your bills on time?
- Credit Card Balances - How much do you owe on how many accounts?
- Credit Inquiries - How many times have you had your credit checked?
Don't change anything for at least 60 days before applying for a loan. When a person is 30 days past due and the balance is still unpaid your score could take a 60 point hit. Even when past delinquencies have been resolved it might cost as much as 20 points. Older credit accounts count more than young ones in your credit score. Those accounts opened less than six months hurt, those over six months won't , and over 2 years it helps your credit. Don't credit card "hop". Each time you apply for new credit your points are dinged by 5 points.
FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate. When credit shopping for a mortgage, if completed in a two week period, it counts as only one inquiry.
What can you do about your FICO score? Unfortunately, not much. Since the score is based on a lifetime of credit history, it is difficult to make a significant change in the number with quick fixes. The most important thing is to know your FICO score and to ensure that your credit history is correct. Conveniently, Fair Isaac has crated a website www.myFICO.com that let's you do just that.