About Your Credit Score
Credit Rating
Your credit rating is based on the information
in your credit report. This information is converted into a number
-- a credit score -- that the lender uses to determine whether
you are likely to repay your loan in a timely manner.
The scores used in mortgage lending are
typically in the 300 to 900 range. A general guide is that
the higher your score the better. But you should keep in
mind that your credit score is just one of several factors
that will be used to evaluate your mortgage loan application.
It is important to know that your
credit score is based solely on information in your
credit report. Factors such as race, age, religion,
national origin, marital status, gender, income, where
you live, and employment are not considered in determining
your credit score.
Credit reporting agencies maintain files on millions of borrowers.
Lenders making credit decisions buy credit reports on their prospects,
applicants and customers from the credit reporting agencies.
Your report details your credit history as it has been reported
to the credit reporting agency by lenders who have extended credit
to you. Your credit report lists what types of credit you use, the
length of time your accounts have been open, and whether you've paid
your bills on time. It tells lenders how much credit you've used
and whether you're seeking new sources of credit. It gives lenders
a broader view of your credit history than do other data sources,
such as a bank's own customer data.
Creating Your Credit Report
Your credit report does not really exist until you or a lender
asks for it. It is then compiled by the credit reporting agency based
on the information stored in that agency's file. This information
is supplied by lenders, by you and by court records.
Tens of thousands of credit grantors - retailers, credit card issuers,
banks, finance companies, credit unions, etc. - send updates to each
of the credit reporting agencies, usually once a month. These updates
include information about how their customers use and pay their accounts.
Your credit report reveals many aspects of your borrowing activities.
All pieces of information should be considered in relationship to
other pieces of information. The ability to quickly, fairly and consistently
consider all this information is what makes credit scoring so useful.
Credit Scores
Along with the credit report, lenders can also buy a credit score
based on the information in the report. That score is calculated
by a mathematical equation that evaluates many types of information
that are on your credit report at that agency. By comparing this
information to the patterns in hundreds of thousands of past credit
reports, the score identifies your level of future credit risk.
In order for a FICO® score to be calculated on your credit report,
the report must contain at least one account which has been open
for six months or greater. In addition, the report must contain at
least one account that has been updated in the past six months. This
ensures that there is enough information - and enough recent information
- in your report on which to base a score.
About FICO scores
Credit bureau scores are often called "FICO scores" because most
credit bureau scores used in the US are produced from software developed
by Fair Isaac and Company. FICO scores are provided to lenders by
the three major credit reporting agencies: Equifax, Experian and
TransUnion.
It's important to note that raising your score is a bit like losing
weight: It takes time and there is no quick fix. In fact, quick-fix
efforts can backfire. The best advice is to manage credit responsibly
over time. See how much money you can
save by just following these tips and raising your score.
Payment History Tips
- Pay your bills on time. Delinquent payments and collections
can have a major negative impact on your score.
- If you have missed payments, get current and stay current. The
longer you pay your bills on time, the better your score.
- Be aware that paying off a collection account will not remove
it from your credit report. It will stay on your report
for seven years.
- If you are having trouble making ends meet, contact your
creditors or see a legitimate credit counselor. This won't
improve your score immediately, but if you can begin to manage
your credit and pay on time, your score will get better over
time.
Amounts Owed Tips
- Keep balances low on credit cards and other "revolving credit". High
outstanding debt can affect a score.
- Pay off debt rather than moving it around. The most
effective way to improve your score in this area is by paying
down your revolving credit. In fact, owing the same amount but
having fewer open accounts may lower your score.
- Don't close unused credit cards as a short-term strategy
to raise your score.
- Don't open a number of new credit cards that you don't
need, just to increase your available credit. This
approach could backfire and actually lower score.
Length of Credit History Tips
- If you have been managing credit for a short time, don't
open a lot of new accounts too rapidly. New accounts will
lower your average account age, which will have a larger effect
on your score if you don't have a lot of other credit information.
Also, rapid account buildup can look risky if you are a new
credit user.
New Credit Tips
- Do your rate shopping for a given loan within a focused
period of time. FICO® scores distinguish between a
search for a single loan and a search for many new credit lines,
in part by the length of time over which inquiries occur.
- Re-establish your credit history if you have had problems.
Opening new accounts responsibly and paying them off on time
will raise your score in the long term.
- Note that it's OK to request and check your own credit report. This
won't affect your score, as long as you order your credit report
directly from the credit reporting agency or through an organization
authorized to provide credit reports to consumers.
Types of Credit Use Tips
- Apply for and open new credit accounts only as needed. Don't
open accounts just to have a better credit mix - it probably
won't raise your score.
- Have credit cards - but manage them responsibly. In
general, having credit cards and installment loans (and paying
timely payments) will raise your score. Someone with no credit
cards, for example, tends to be higher risk than someone who
has managed credit cards responsibly.
- Note that closing an account doesn't make it go away. A
closed account will still show up on your credit report, and
may be considered by the score.
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