Credit scoring is a scientific system creditors use to help determine whether to give you credit. The scores are based on data from your credit history and your payment patterns which are stored in a credit bureau's file when you request a credit report. Factors which influence your credit report are:
- Past payment performance (35% of the credit score's weight)
- Credit Utilization (30% of the credit score's weight)
- Credit History (15% of the credit score's weight)
- Types of Credit in Use (10% of the credit score's weight)
- Inquiries - New Applications for Credit (10% of the credit score's weight)
A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points, or credit score, helps predict how creditworthy you are. Because the score is a total of many factors, no single factor - like bankruptcy- will be the sole cause for an unfavorable score.
How Credit Scoring Helps Mortgage Lenders
- Scoring gives lenders a reliable method of controlling delinquencies.
- Scoring speeds up the decision-making process and allows more time for a lender's underwriters to focus on the credit decisions.
- As lenders continue to compete with one another, applicants with lower degrees of credit risk can be offered more favorable terms in order to capture a greater market share.
- Credit scoring is automated and objective which helps remove the potential for bias and forces lenders to comply with fair lending laws.
The "Do's" and "Don'ts" to Improving Your Credit Score
|DO||pay down revolving credit card debts to below 30% of the available balance.|
|DO||review the credit information with each repository for accuracy.|
|DO NOT||consolidate debt onto one or two cards and close others. This may actually skew the appearance of an applicant's credit utilization.|
|DO NOT||close accounts unless the reason code indicates that there are too many revolving accounts and all of their accounts have little or no balance.|
|DO NOT||go to Consumer Credit Counseling. They are paid by collectors for the trade lines.|
Additional information on ways to improve credit scores can be found at:
- www.myfico.com: a division of Fair Isaac Corp., a Minneapolis analytics firm that developed credit scores.
- www.mycrediteducation.com: Equifax consumer site
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