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How are Credit Scores Determined?

How are credit scores determined?

Credit scores have a huge impact on your ability to finance a home for purchase or refinance. 

Many consumers don't understand even the most basic rules of determination of their credit score.  Understanding credit, in my opinion, should be required of high school and college graduation.

What is credit?  According to Merriam-Webster.com credit is:  the provision of money, goods, or services with the expectation of future payment <long-term credit>; also : money, goods, or services so provided <exhausted their credit>

There are three credit bureaus: Transunion, Equifax and Experian.  The credit bureaus are not government agencies as some think, they are in business for profit.   Their purpose is to gather information on your past/current credit history and sell it to creditors who are looking to determine if you have a likelihood of repaying the debt as agreed. 

I have seen studies that show that up to 80% of credit reports have at least one error on it.  The errors may not affect your score or could have a huge impact. Some common errors:

1.  Incorrect name, mis-spelling of name

2.  Showing Balance due where none exists or incorrect balance

3.  Combining credit with someone with similar name (Jr., Sr., Etc)

4.  Payment History errors

If you are considering a home purchase, or even a vehicle purchase, it is important to review your credit very early in the process. 

If you use a free service like annualcreditreport.com or even a consumer credit report directly from one of the three bureaus, you will get an estimate of your credit score. When you credit is pulled by a mortgage company, your credit score will probably be very different.  I have seen scores vary as much as 75-100 points!  The algorithms (mathamatical formulas) used to determine your score is different when pulled for "informational purposes" versus for specific purposes (like for a mortgage). 

Your credit score is a picture of a moment in time, by understanding the following, you can help to make that picture a better one!

  • 35% is based on payment history-
  • Do you pay ALL your bills on time (not 30 days or more late) or do you have late pays, collections, judgments, bankruptcy?  The farther you are removed from a negative item, the less impact it has on your score.  Did you know if you don't pay a speeding ticket, it could become a collection and drop your score?

    30% is based on the amount you owe versus your available credit.

    Are you maxed out or do you owe less than 25% of credit available on each credit line?

  • 15% length of credit history
  • Did you just open your first credit card or have you had a long credit history?

    10% is based on inquiries. 

    In the last 12-24 months, how many times have you applied for credit (vehicles, retail -Old Navy, Best Buy, Kohls, etc.  Applications for new credit can drop your score by up to 50 points.  If you are considering a home purchase, that 10% off new jeans isn't worth it!

    10% is based on the mix of credit you have

    Installment (mortgages, car loans), Revolving (credit cards) Student loans, etc.

    It is very important to know your score.  Not only can a low score delay your purchase, it can cost you. If your score is even 1 point below the guideline, it can cost you thousands in fees, a higher rate for mortgage insurance or even a higher interest rate.

    Don't let your credit score cost you the home of your dreams.  Make sure you are working with a professional who understands credit.  Sometimes you can actually lower your score by paying off the wrong thing, beware! 

    The right mortgage professional can review your credit and give you suggestions for improving your score. If you have had a more challenging credit past, you may need some help from a credit specialist.  There are some folks that are really good, and there are companies who can take your money and run! Please be careful if you are considering credit restoration, ask for a recommendation.

    To get a good understanding of credit and debt you may want to pick up a copy of "The Big Score, Getting it and Keeping It, Buying Power for Life" by Linda Ferrari or Dave Ramsey's "The Total Money Makeover".

    Warm Regards,

    Bridget McGee  Maryland Mortgage Mama  NMLS# 196068  SWBC Mortgage.   410-960-2061 EHO   bridget.mcgee@swbc.com or www.marylandmortgagemama.com

     

    If you are considering purchasing a home in Maryland and want to be sure you are mortgage ready, my brother Tony and I will be happy to help! We help to make the mortgage process a pleasure! 

    If you already own your home, we are happy to provide a no-cost mortgage review to help you to determine if refinancing may be in your best interest.  Please contact me at 410-960-2061.

    Comment balloon 2 commentsBridget "Mortgage Mama" McGee • May 01 2011 01:49PM

    Comments

    Bridget, Thanks for sharing such valuable information. Thanks for getting both lender letters to me today! I know you said not til Monday and then you just make it happen!

    Margaret

    Posted by Margaret Rome, Baltimore Maryland, Sell Your Home With Margaret Rome ( HomeRome Realty 410-530-2400) over 8 years ago

    Margaret,  Credit is such an important part of financing a mortgage. I will do anything to get you what you need when you need it as long as I have all the information needed in hand!

    Thanks!

    Posted by Bridget "Mortgage Mama" McGee, Maryland Mortgage Mama NMLS#196068 (SWBC Mortgage 410-960-2061) over 8 years ago

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