So you’re looking to make a major financial decision. Without doubt, your bank, lender, or mortgage company will want to see the proof of what you have to offer in terms of your credit. And obviously, the major quantitative measure of your fiscal nature is your credit score. While it doesn’t necessarily paint a vivid picture of who you are as a person, it does a pretty good job of explaining how you’ve managed your finances and, more importantly, how well you’ve managed debt obligations. Here’s what you should know about your credit score.
What is a Credit Score Anyway?
You probably already know that you credit score is a three-digit number that tells some sort of story about how you’ve been as a credit recipient; however, there are some things you may not know about what a credit score is and how it’s calculated.
The primary credit scoring agency in the business is FICO (formerly Fair, Issac and Company) which is an analytics company specializing in taking credit reports and turning them into quantifiable data that lenders can use to objectively assess their potential borrowers. According to myFICO.com, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.”
Your FICO credit score can range anywhere from 300 to 850. The higher number, as you may be able to figure, corresponds to less risk of default or fall behind on credit-based monies. What a credit score really tells lenders is how likely you are to default on or get seriously behind on your debt obligations in the next 24 months.
What Factors Affect Your Credit Score?
According to FICO, payment history, amounts owed, length of credit history, the types of credit used, and new credit account for how your credit score is calculated. Depending on how your perform in each one of these categories will depend on how much and to what degree your credit will be affected.
FICO reports the following weights for each one of these categories:
• Payment History – 35%
• Amounts Owed – 30%
• Length of Credit History – 15%
• Types of Credit Used – 10%
• New Credit – 10%
With those facts presented, you can probably draw the conclusion that paying on time and reducing the amount you owe on accounts can significantly improve your credit score. Essentially, if you’ve taken care of business you have nothing to worry about with regards to your FICO score.
How Do You Get Your Credit Score?
By Federal law, as a consumer, the three credit reporting agencies are required to provide you with your credit score. While mandated by law, this service isn’t necessarily free. Each credit reporting agency (Equifax, Experian, and TransUnion) are required to furnish one free credit report per person each year. What this means is you have three free stabs at getting your credit history and free credit report.
One way to monitor your credit throughout the year is to request your credit report from one of the three reporting agencies every four months and keep record of those scores. This way, you’ll have an update on your credit report throughout the year and have an opportunity to repair or correct any credit discrepancies before they become burdensome.
Credit Scores and Mortgage Rates
A bad credit score won’t ruin your life and a good one won’t earn you a million dollars anywhere, but knowing how your credit score affects your home investment is extremely important.
Bankrate.com has some great information on how your credit score affects mortgage rates and lenders can learn a lot from what they find on your credit report. Essentially, a 620 credit score can possibly get you a mortgage loan, but a score of 740 or more will get the best possible interest rates from most lenders. Since the housing market crash of 2008 where subprime mortgages were handed out like candy, lenders have had to be increasingly more stingy with loans.
The difference between simply getting a loan and getting a great interest rate could be over $1,000 per month in principal and interest payments. This basically comes down to the difference in interest rates, and the rates spread from a poor credit score to an excellent one could be as much as an entire percentage point. While this may not seem like a lot, it could result in tens of thousands of dollars in interest payments over the life of your loan.
Next Steps
Making sure you know your credit score is a great place to start, but getting in touch with a mortgage professional from Tidewater Mortgage Services is an even better way to get in in a home of your own. A professional account manager from Tidewater can get you moving in the right direction and help you find a mortgage solution that works for you.
