Welcome Back to #FabulousFriday! Credit scores influence the credit that's available to a person and the terms (interest rate, etc.) that lenders may offer. It's a vital part of credit health.
When you apply for credit — whether for a credit card, an auto loan or a mortgage—lenders want to know what risk they'd take by loaning money. When lenders order a credit report, they can also request a credit score that's based on the information in the report. A credit score helps lenders evaluate a credit report. It is a number that summarizes credit risk, based on a snapshot of a credit report at a particular point in time.
Your FICO Score
FICO is a numerical score of credit-worthiness assigned to anyone who has applied for consumer credit. The most widely used credit scores are FICO Scores, the credit scores created by Fair Issac Corporation.
Until a few years ago, FICO scores had little to do with mortgage lending. Underwriters made decisions based on payment history and income-to-debt ratios. But they began to look at the relationship between credit scores and mortgage delinquencies. People with low FICO scores defaulted on loans with far greater frequency than did their higher scoring peers.
Your FICO scores may differ slightly between the three national credit bureaus, Equifax, Experian, and Trans Union. In general, however, each agency uses the following issues to determine your score.
1. Delinquencies. A 30-day late payment is not as risky as a 90-day late payment. Still, it’s best to avoid either.
2. New credit. Creditors expect you to open accounts in order to establish credit, but you run the risk of reducing your score by opening several credit accounts in a short period of time. It suggests you are overextended and may not be able to meet new credit obligations.
3. Short credit history. A longer credit history is more impressive than a newly established one.
4. Balances on revolving accounts near maximum limits. A consumer close to “maxing out” cards may have trouble making payments in the future.
5. Public records (tax liens, judgments, bankruptcies). These all jeopardize a healthy FICO score.
6. Consumer credit agencies. Although they offer consumers lower interest rates and credit counseling, the use of credit counseling services negatively affects FICO scores.
7. No recent credit card balances. Having a very small balance without late payments can improve your FICO, showing that you manage credit responsibly.
8. Too few revolving accounts. If you fail to use credit, there is no way to evaluate your ability to manage it.
9. Too many revolving accounts. Multiple revolving accounts suggest a high risk of over-extension.
What is a good credit score?
Most credit scores have a 300-850 score range. The higher the score, the lower the risk to lenders. A "good" credit score is considered to be in the 670-739 score range.
|Credit Score Ranges
|This credit score is well below the average score of U.S. consumers and demonstrates to lenders that the borrower may be a risk.
|This credit score is below the average score of U.S. consumers, though many lenders will approve loans with this score.
|This credit score is near or slightly above the average of U.S. consumers and most lenders consider this a good score.
|This credit score is above the average of U.S. consumers and demonstrates to lenders that the borrower is very dependable.
|This credit score is well above the average score of U.S. consumers and clearly demonstrates to lenders that the borrower is an exceptionally low risk.
While many lenders use credit scores like FICO Scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable. There is no single "cutoff score
Credit scores can affect your interest rate. Some lenders establish lower interest for high FICO scores and higher interest for low scores. Some will not loan at all to people with low FICOs. And other lenders specialize in finding loans for the FICO-score challenged. If you have less than perfect credit, keep looking until you find a lender who will work with you.
Check back next Friday for more helpful real estate tips and tricks. See you soon. Warmly, Susan