Connecticut mortgage lender Rick Cignoli has written an excellent article about the credit score. Many consumers are unaware of the factors that affect their FICO score.
Rick explains the different factors and approximately how much rach factor is weighted in the overall score.
It is important to ask your lender what FICO score is used in the underwriting of the file. It could be:
- The score of the borrower witht the lowest middle score of all borrowers
- The middle score of the borower who makes the most money
- An average of the middle score of all borrowers
- Another method
Your Credit Score is the most obvious factor in your ability to getting your Mortgage
Application approved. The higher your score, typically the less risk you pose to lenders and the lower your mortgage interest rate. So how is your credit score determined? And how can you improve it?
Your Credit Score is based on the following 5 factors:
1. Your Payment History. (35% of your score)
♦ Your payment history shows whether you make your monthly payments on time, how often you might miss making your payments, how many days past due the due date you eventually make your payments, and how recently your payments have been delinquent.
♦ How To Improve It: Make all your monthly payments on time. The more payments you pay promptly, the higher your score. Each time you miss a payment, you risk losing valuable points on your score.
2. Amount Owed on Loans and Credit Cards.(30% of your score)
♦ Your score is also based on the entire amount you owe, the number and types of credit accounts you have, and the proportion of money owed compared to how much credit you have available.
♦ How To Improve It: Smaller balances on your credit cards can raise your score – if you pay on time. High balances and maxed out credit lines will lower your score. Keep your credit card balance to less than 30-50% of your credit line.
New loans with little payment history may drop your score temporarily because your report will show the recent inquiry into your report to obtain the new debt.
Loans that are closer to being paid off can increase your score because you have a longer track record of paying the installments on time.
3. Length of Credit History. (15% of your score)
♦ The longer you can show a history of meeting your obligations in a timely manner, the higher your score will be.
♦ How To Improve It: This simply takes time. No credit or no no recent credit is not necessarily a good thing. It may seem wise to avoid using credit, or to avoid applying for credit, but it can actually hurt your score if mortgage lenders have no credit history to review.
4. Types of Credit Accounts.(10% of your score)
♦ A mix of credit accounts is best.
♦ How To Improve It: If you only have one type of credit account, add another type when it makes financial sense to do so. A mix of car loans, personal loans, retail store accounts and major credit cards will improve your score – if you manage them wisely and make the payments on time.
5. Recent Credit Activity. (10% of your score)
♦ Steady credit activity is best.
♦ How To Improve It: If you’ve opened a lot of accounts recently, or applied to open new accounts, it suggests potential financial trouble and can lower your score. The lender will see the inquiry on your report and require a letter of explanation as to why you opened these accounts and whether there are balances that haven’t shown up on your report yet.
However, if you’ve had the same accounts for some time and you repay them on time – even after some payment troubles – your score will eventually go up.
Review Your Credit Report Annually
It’s smart to stay on top of your credit report, and to kow what potential mortgage lenders will see. You can request a FREE Annual Credit Reportfrom each of the 3 major credit reporting agencies – Equifax, TransUnion & Experian once a year at www.AnnualCreditReport.com
Review your reports carefully, as each one may contain inconsistent information or inaccuracies. You have the right to dispute any error by contacting the agency with in 30 days of receiving your report.
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