Credit and Credit Scoring


Credit is one of the most important components in the mortgage approval process.  Lenders look at a borrower’s credit score and other information on the credit report in determining whether to approve a borrower.

A credit score is  based on a statistical analysis of a person’s credit report information(see the factors below), from these three credit bureaus: Equifax, Experian, and TransUnion.

You can get a free copy of your credit report once a year by visiting the website AnnualCreditReport.com.  Getting your credit score however, will be an additional fee.

Factors That Impact Your Score:

1. Payment History (35%)

It is essential to pay your credit bills on time. Every 30 day late, collection, judgment or Bankruptcy significantly drops your score.

2. Amount You Owe Compared to Balances (30%)

Your available credit compared to the amount owed. It’s a good rule-of-thumb to be at 40% or less of the available balances

3. Length of Credit History (15%)

Easy rule-of-thumb: the longer your accounts are open, the more positive impact it will have on your overall credit score.  In fact, if you happen to have a card that is over 10 years old with even a little activity, it would probably be a bad idea to close that card.

4. Mix of Credit (10%)

Generally speaking, if you have loans, such as a car loan, as well as open credit cards, it helps prove to creditors that you have experience borrowing money.

5. New Credit Applications (10%)

There is a model that compensates for people shopping rates on home and car loans, but it can hurt your credit score to have multiple reports pulled in a short amount of time.

Factors That DO NOT Impact Credit:

  • Age
  • Race
  • Sex
  • Employment History
  • Income
  • Marital Status
  • If you’ve been turned down for credit
  • Length of time at current address
  • Whether you own a home or rent
  • Information not contained in your credit report

Establishing Credit:

Several factors can be used to establish credit initially, including bank accounts, employment history, residence history and utility bills.

Although they are not reported directly to credit bureaus, bank account history is important to lenders for first time loans and should be kept in good standing. (no NSF checks)

While they are also not reported to credit bureaus, utility bills (such as electric, telephone, cable and water) can also show a lender the risk associated with a new borrower.

Credit may be initially established through a bank, in which a credit card is linked to a specific amount of money deposited in the bank.  If the credit card is not kept in good standing, the bank can then take the secured funds for payment.

Initial credit may also be established with a department store credit card (for example), but borrowers should beware of the high interest rates associated with these cards and pay off the balances in full.

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