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Credit Score

Credit Score

A credit score is a number that indicates how likely a borrower is to repay future debts. Credit scores speed up the mortgage approval process for many people because they identify low-risk borrowers quickly.

The most common credit score used by lenders is the FICO® score, which ranges from 300–850. The higher the score, the better. The FICO score is generated by a mathematical formula (called a scoring model) developed by Fair, Isaac Corp. Your FICO score affects how much money and what loan terms (interest rate, type of loan, etc.) lenders will offer you at any given time. The scores are not based on human judgment. The scoring model applies the same standards to everyone.

You have three FICO scores, one from each of the three credit reporting agencies: Experian, TransUnion and Equifax. Each of these private national agencies collects information about each consumer and keeps it electronically in an individual consumer credit record, called a credit report. To generate a FICO credit score, the credit agency runs the data in a credit report through its FICO scoring model. When the information on your credit report changes, your credit score tends to change too.

For your FICO scores to be calculated, each of your credit reports must contain at least one account that has been open for a minimum of six months. In addition, each report must contain at least one account that has been updated in the past six months. This ensures that enough information — and enough recent information — is in your report to generate a FICO score.

By law, you are entitled to receive one free credit report from each of the three national credit reporting agencies per year. You can order them or view them immediately online at http://www.annualcreditreport.com — after you provide identification information. You also may order your credit score from each agency, but you will have to pay a small fee per score.

Each credit report (see examples from www.creditrepair.org) includes the following data, collected from creditors and public records:

  • Identifying information (name, address, employer, Social Security number, etc.)
  • Debt and payment history on credit cards, student loans, consumer loans, car loans, etc.
  • Previous collections
  • Tax liens, judgments and bankruptcies
  • Inquiries for new credit

This is how payment and debt information ranks in your score:

  • Payment History: 35 percent
  • Amounts Owed: 30 percent
  • Length of Credit History: 15 percent
  • New Credit: 10 percent
  • Types of Credit Used: 10 percent

These factors are NOT considered in credit scoring systems:

  • Income
  • Race
  • Religion
  • Gender
  • Marital status
  • Nationality
  • Age
  • Receipt of public assistance

Credit scores can vary
In general, when people talk about your "credit score," they are talking about your current FICO score. Many lenders get credit scores from smaller credit bureaus that typically get FICO scores from the national credit reporting agencies. However, some lenders generate their own credit scores or get them from a custom credit score developer. As a result, there is no one score used to make decisions about all borrowers. In addition:

  • Credit agency scores are not the only items used. Scores generated by lenders may include other information about you, as well as the FICO score.
  • FICO scores are not the only credit agency scores. In addition to FICO, the three agencies may use different scoring models, although FICO scores are most commonly used in mortgage lending. Other types of national scores may evaluate your credit report differently, and in some cases a higher score may mean more risk, not less risk as with FICO scores.
  • Your FICO score may be different at each of the main credit reporting agencies. The FICO score from each credit reporting agency considers only the data in your credit report at that agency . If your current scores from the credit reporting agencies are different, it's probably because the information those agencies have on you differs. You should check your report at all three agencies once a year.

If any of your credit reports contains inaccuracies, contact the credit agency that compiled the report. All three agencies detail their dispute processes on their Web sites. The Fair Credit Reporting Act (FCRA) requires the agency to investigate your disputed items within 30 days. The credit reporting agency must provide you with written notice of the results of the investigation within five days of its completion, including a copy of your credit report if it has changed based upon the dispute. If ever you are denied credit, you are entitled to a free credit report.

The Federal Trade Commission (FTC) is responsible for enforcing the FCRA. The FTC also publishes consumer-related brochures where you can obtain additional information on credit reports. To contact the FTC, call or write:

Federal Trade Commission
Public Reference Branch
6th Street and Pennsylvania Avenue, NW
Room 130
Washington, DC 20580
Phone: 202-326-2222
http://www.ftc.gov/bcp/conline/edcams/credit/index.html
http://www.ftc.gov/ftc/moreinfo.htm

Know before you apply
When you apply for a mortgage, you can be better prepared if you get a copy of your three credit reports to review before your meeting. If there are any errors, you can take steps to correct them before you submit your application. If you have had credit problems, be prepared to discuss them honestly and come to your application meeting with a written explanation. Every lender knows there are unavoidable reasons for credit lapses, such as unemployment, illness or other financial strains. If you have had a problem but have worked with your creditors to correct it, and your payments have been on time for a year or more, you’ll probably have nothing to worry about.

If a lender asks you to pay off an account to improve your debt ratio, it typically takes 30 days for the new information to appear on your credit report. If you need to prove this sooner, talk to the creditor about getting a letter or ask the closing attorney to indicate the paid account on the closing statement. However, a lender may be bound by underwriting requirements imposed by an investor.