What is your credit score?  Not just the numerical score, but where does the score come from, how is it calculated, and what does it mean?  Whether you are looking for a mortgage for your new home, financing for a new or used car, an apartment rental, or a new credit card….. Your credit score plays a major factor in the approval process.

The credit score is derived from a formula introduced three decades ago by  Fair Isaac & Company (FICO).  Nearly all consumers know there are credit scores, but most do not know what they really mean when seeking credit of any type.  The credit score is also known as the FICO score.  The FICO score will range from 300 to 850.

The credit score is used to determine the risk to the lender of making a mortgage, auto, or consumer loan.   It is often the most important indicator of how well you will meet your loan obligation based upon how you met your credit obligation in the past.   Since a lender decision on a mortgage or loan is based on lender risk, the score will also impact the rate for the loan. 

Normally scores above 720 at considered excellent and will result in a positive impact on a lender decision to approve a loan and offer the best rates.  Scores below 600 are considered to be low.  If your loan is approved with the low score, you most likely will have to pay a higher interest rate based on the risk the lower score indicates.

The exact formula used for the FICO score is not published by Fair Isaac & Company.  The following are the major categories and the approximate weight for each:

Payment History (Late payments, judgments, bankruptcy, collections)…………… 35%

Outstanding Debt (Number of open accounts, average balance, credit limits)……. . 30%

Credit History (How long you have had open accounts)…………………………….15%

Credit Report Inquiries (New account inquiries, time since last inquiry)……………10%

Type of Credit (Finance company as opposed to revolving credit)…………………..10%

The bottom line is, know your FICO score and know what is in your actual credit report before you seek credit.  There are numerous online sites to obtain both reports and FICO scores.  If you need help understanding your score or report, contact me at Buyers Home Store.  I’ll be glad to chat with you anytime.