8 Crucial Facts You Should Know About Credit Scores

What You Must Learn About Credit Scores

Before attempting to acquire home financing, you must first check if your credit score is in good standing. Most lenders assess the credit score, and it could either get you approved or denied for a loan. Hence, it's prudent to check your credit score first when you are attempting to get financing for your new house.

Your credit score is the main factor that could either get you approved for a home loan or not. So if you are planning to get a home loan soon, you should know what details are in the credit report and learn the reasons why it's better for you to run your own report first before allowing a potential lender to do so. Here are some crucial facts that you need to know about your credit score.

1A Credit Score Is Crucial In Home Loans

Moneylenders, banks, and other institutions rely heavily on the credit score to assess the reliability and trustworthiness of loan applicants. Your credit score plays a major role in whether or not you get mortgage loan approval. Having no credit will make it difficult for you to get a mortgage loan.

It's vital to have a credit score because this will illustrate your creditworthiness, and it will give lenders a glimpse of how you deal with your financial affairs. The score is computed based on your credit history. The higher the number, the better your credit score, and the easier it will be for you to get loan approval. In case your score is lower than a specified number, it means that your credit is poor, making it difficult for you to secure a loan.

2It's Based On Your Credit History

Before applying for a mortgage loan, you must first check the status of your credit score. This number represents the credit history of a consumer. People who have high credit scores will enjoy a better interest rate than those who have lower scores. Lenders also use the score to predict whether or not the borrower is likely to default on his loan.

In case the credit score is high or satisfactory, this means that the borrower is likely not to miss any payments. However, if the score is poor, the risk that the borrower could default or miss making his payments is greater. Credit scoring is a tried and tested method that has been used for decades. In most cases, this scoring technique applies to those who often use credit cards.

3It Determines Instant Credit Approval

Have you ever noticed signs in malls or department stores that say "instant approval" as long as you open an account with their store? These businesses use a scoring standard. General information about you will be put into a vast database, including the following: salary, places lived, status (whether you are a homeowner or a renter), and other personal details. A software program will determine what your credit is in a few minutes; afterward, you're likely good to go! You can then shop until you drop.

In the case of mortgage credit scoring, it is a new concept compared with consumer lending options, like installment loans and credit cards. FICO or Fair Isaac Corporation created the mortgage credit scoring method, but what exactly is FICO? FICO is composed of three major credit reporting companies that acquire information using several ways and from different areas in the country. Moreover, your score could be as low as 300 or as high as 850.

4Payment Patterns Affect Credit Scores

A credit score of 720 and above is considered excellent. A credit rating of about 680 is good, while one that is about 660 is average. Scores that fall below these numbers are classified as "damaged." Several ways are used in order to determine the credit score. This is what the public also knows.

Nevertheless, the public is not privy to information regarding how the score is actually calculated as a way for credit companies to hinder people from altering their scores. The score is customarily based on a two-year comprehensive review of a person's credit habits. A numerical value results after certain factors are meticulously assessed, such as credit availability, payment patterns, and other issues. In general, these scores help in explaining the payment behavior of a certain person. Also, two of the essential factors are the amount owed and payment history.

5On-Time Payments Matter

Around 35% of your credit score comes from how you paid your dues, while 30% is based on the amount owed. Once you determine these two factors, it will be easier for you to spot other elements that help in determining your score. Simply put, a payment pattern refers to whether or not you pay your dues on time.

If you have never been late in making your payments, your score will likely be higher, while making late payments for the last two years will likely reduce your overall score. To illustrate, if your score was a decent 700 and if you made a recent late payment on your auto loan, your score will probably drop to 650 and then to 600 if you were late again. Your credit score will be higher if other elements are in order and if you always see to it that you pay on time.

6Your Available Credit Is A Factor

The scoring method that gives an overview of the balances in your accounts is commonly called the "available credit." A credit company prefers someone who possesses open credit accounts that are not near or over the limit. To explain, let's say that you have a $10,000 limit on your MasterCard, which means that you will likely get a lower score if the amount you owe is closer to the limit, and it will drop even further if you go over the limit.

Your credit score will not improve if you're only making the minimum monthly payments. You will only put your record and your case at risk if you cross the credit line. Your credit score is generally based on the frequency of your timely payments or whether or not you pay on or before the fees are due.

7Late Payments Have Detrimental Effects

Another factor that is taken into consideration when computing the credit score is the frequency of your late payments and to what extent you are late based on thirty-day increments. To clarify, if you made a payment that is 90 days late, this would have a bigger impact on your credit score compared with being late for 30 days. However, this issue will no longer have a bearing if this happened five years ago, especially if you are now paying your dues on or before these are due. This is because those who compute the score are more interested in recent and not past behavior.

In addition to this, your accounts that are under collection and those that a creditor has surrendered will all be included in your payment history. Judgments, tax liens, filed bankruptcy, and other money-related issues that affect credit are a matter of public record. These will be included in the overall assessment in order to determine the credit score.

8It's Affected By How Much You Owe

It is quite simple to determine what you owe. What has to be established is the ratio based on how much you can borrow compared with how much you owe. But remember that there is a noticeable difference between the real score and credit wisdom. Today, some financial experts advise consumers to close unused accounts that have zero balances and to pay and then close the accounts with small balances.

What is the reason behind this? Actually, this was a sound idea before when loans were based on loan credit standards. Today, it still applies; however, this could have a detrimental impact on your score. Consider this: One-third of your total credit score is established by determining the sum you owe; therefore, you need to be careful in putting this idea to practice.

Through the above discussion, you are now more aware of what details you'll find in your credit report. When getting one, check online because there are free credit reports. So learn how you can get them and see what other helpful resources you can find.

But, heed this word of advice: When it comes to financial matters, always be very careful because there are so many scammers out there. Hence, choose an accredited and reliable financial institution to do your credit report check. They will provide you with helpful info about what your credit report may contain before giving your lender permission to run your report.

About Author

Jackie Wing

Jackie Wing is an Alaska native, who enjoys snowboarding more than is probably socially acceptable. She lives in Anchorage with her two dogs Reese and Peanut, or as she likes to call them "Thing 1" and "Thing 2."