Credit Scoring - How It Works

Credit scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. The score is a number that rates risk associated with paying your debt on time.

Scores range from 350 (high risk) to 950 (low risk). Good credit scores are in the 575 to 700 range. A score over 700 reflects excellent credit - and you'll have no trouble qualifying for any kind of Real Estate loan.

There are a few types of credit scores; the most widely used are FICO® scores, developed by Fair Isaac & Company, Inc. Each of the major credit reporting agencies use the FICO score.

Credit scores only consider the information contained in your credit report. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores.

Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.

Different portions of your credit report are given different weights. They are:

· 35% - Previous credit performance (specific to your payment history)

· 30% - Current level of indebtedness (current balance on each credit card compared to available credit limit)

· 15% - Time credit has been in use (opening date)

· 15% - Types of credit available (installment loans, revolving and debit accounts)

· 5% - Pursuit of new credit (number of inquiries)

Paying your bills on time is the most important factor for a good credit score. It is crucial that you make payments on time, even if the debt you owe is a small amount. In addition, you may want to: keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Also don't close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.

When shopping for a car or mortgage, the credit agencies have eliminated some of the negative effects of rate shopping. These consumer-originated inquiries are counted as one inquiry if within the last 30 calendar days. Multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.

Your credit report must contain at least one account which has been open for six months or greater and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.