After 25 years as a Mortgage Professional here in Austin, one area that repeatedly comes up with both the Real Estate community and consumer is the subject of credit scoring and how it affects loan underwriting. With all of the drastic changes in over the past few years in loan products, the issue of credit is more important now than ever.
Simply put, a credit score is a three-digit number based on a borrower’s bill-paying history and debt profile and statistical information about other borrowers that lenders use to determine the likelihood of certain credit behaviors, including whether you will pay on time.
The score that Mortgage lenders use in loan underwriting is called a FICO score. This is the model developed by Fair Isaac & Co. Credit (FICO) back in the late 1950’s. Since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrower’s credit history into a single number. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance.
There are really three FICO scores computed by data provided by each of the three bureaus––There are three major credit bureaus in the United States:
Equifax: 800-685-1111 website: www.equifax.com
Experian: 888-397-3742 website www.experian.com
Trans Union: 800-916-8800 website: www.transunion.com
Your Credit score is based on the final number of individual ratings in five categories:
- 35% of your score is derived from payment history
- 30% of your score is derived from outstanding balances on accounts
- 15% of your score is derived form length of credit history
- 10% of your score is derived from types of credit you carry
- 10% of your score is derived for frequency of credit inquiries
So, how can I increase my score? While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.
- Pay your bills on time. Late payments and collections can have a serious impact on your score.
- Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
- Reduce your credit-card balances to 30% of the credit limit. If you are “maxed” out on your credit cards, this will affect your credit score negatively.
- If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.
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