The Statistics of Credit Scoring
When a mortgage company reviews your loan application, they first
and foremost want to assess your credit and make sure that you
are reliable with money. If you have a lot of past debt, they
may be hesitant to extend a loan to you. They must come up with
an objective credit score so there is a firm and concrete evaluation
of a person’s credit that does not vary according to the
person who assesses it.
Rather, the method they use is a statistical calculation whereby
a number rating is assigned according to the probability or likelihood
that you will pay back the loan. The score will range from 350,
which is high risk, to 950, which is low risk. There are a few
different types of scores such as FICO scores, created by Fair
Isaac & Company, Inc. for all of the credit agencies.
First you should know that your credit score only takes into
consideration the information provided on your credit report.
It does not take into consideration your income, your savings,
the amount of your down payment or any personal information such
as race, gender or marital status.
Credit scores usually tell a lender if you have had any debt
in the past, how much credit you have had, what your outstanding
balances are, your current level of debt, length of your credit
history and number of creditors and/or credit inquiries. Some
parts of your credit profile are more important than others, meaning
that some factors will play more of a role in the lender’s
decision to approve or disprove your loan request.
Thirty-five percent of the weight or priority is put on your
previous credit performance in relation to your payment history.
Thirty percent is put on your current level of debt and current
balanced in contrast to the amount of credit granted. Fifteen
percent of emphasis is placed on the time your credit has been
in use, or the time you have had a credit card open. Fifteen percent
also is put on the types of credit you have used, such as debit
or credit accounts versus loans. And finally, five percent of
the credit evaluation is the number of inquiries you have made,
meaning how many times you have signed up or applied for credit
or loans, whether or not you were approved.
More than anything else, lenders care the most about whether
or not you pay your bills on time. If you have always paid your
bills on time in the past, the mortgage company will probably
feel safe giving you a loan, because they know you can be trusted
to make timely payments. Second, lenders look at how much revolving
credit you have inclusive of how often you open cards or how long
they remain active.
You should not open a lot of credit unless it is necessary. Sometimes
you will forget you have an account open and it will affect your
credit profile later. Also, make sure that you have at least one
account that has been open six months or longer. Otherwise the
lender may need more credit/financial information to make a decision.
Your credit score will always be accompanies by a reason code.
There are four main reason codes that pinpoint why you received
the score you did, or why you were approved or rejected for your
loan. The code gives the most significant or influential factors
of your report, not all of the little or more minor considerations.
Remember that these scores and codes are given by the mortgage
company, not by the credit agency.