Anyone who has been watching the news lately has heard about the current credit crises.  Credit scores are being used for everything these days, including mortgages, credit cards, insurance, and even employment decisions. Your credit score can be the number one thing that causes you to receive a “yes” or “no” to an application.  Depending on the FICO score, lenders may alter the terms up or down depending on their tolerance for risk and reward.

Credit scoring is primarily based around your FICO score.  Fair Isaac Corporation is the founder and the originator of credit scoring models that date back to the late 1950s.

The score is a number between 300 and 850.  Typically anything below 600 is considered someone who probably has credit problems that need to be addressed.  Your score is used by financial institutions to help determine your personal ability to repay a loan or debt. About 90% of financial institutions use the FICO score to aid in their decision making process.  Since it is so widely used it would be beneficial to take a proactive approach to manage your score.

Lenders use the FICO score to determine if they want to loan you money.  Consumers with lower scores are considered to be “high risk” by lending institutions and while they may still be able to obtain credit, will be charged a higher interest rate to compensate for the lender’s higher risk. Consumers with higher FICO scores are considered to be less risky by lenders

A FICO report typically contains information from the three major credit scoring companies, TransUnion, Experian, and Equifax. This is also sometimes called a tri-merge report.

One of the most important factors in your credit score is payment history. So try to keep your bills current and make regular payments.  Late payments will drag your score down in just a few months while paying bills on time may require six to 12 months to significantly boost your score.  Late payments on personal loans, credit cards , mortgage payments, car loans and other bills can sometimes be explained away when applying for more credit, as long as there are only one or two. But when you have late payments on all of your obligations, you are going to have a harder time getting more credit

Lenders are also interested in the type of loan you had, such as a credit card, mortgage, installment loan (a loan with a fixed number of payments, like a car payment), consumer finance account (generally considered a lower tier type of loan made by companies who generally lend to higher risk individuals), etc

Lenders now appear to be going back to a more traditional lending practice(where the borrower can actually afford the loan they are getting) as opposed to the wild lending practices of the sub-prime era.

This entry was posted on Thursday, March 26th, 2009 at 3:32 am and is filed under Mortgage. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.