Credit Score - Magic number!!!

Have you ever wondered why is credit score so important to obtain a mortgage? Many folks are frustrated on being able to avail the lowest interest rates in spite of high credit scores. Let's demystify the theory behind credit score and it's huge impact on obtaining a mortgage.

Your credit score is the numerical representation of your credit history. It’s a three-digit number that expresses how consistent you are when you pay back debts.

 

Your credit score is based on information the three major credit bureaus – Equifax, TransUnion®and Experian – collect about you from creditors. Creditors include companies you borrow from or make payments to. Your mortgage or student loan lender, your credit card company, your landlord and your utility company can all report information to the credit bureaus about how you make payments.

Your credit score comes from the information on your credit report. Credit reports are detailed summaries of your borrowing history. They show previous and current credit accounts and your payment history. When you apply for a loan, your lender uses your credit report and score to determine whether to lend you money.

 

The credit score model was created by the Fair Isaac Corporation, also known as FICO, and it is used by financial institutions. While other credit-scoring systems exist, the FICO score is by far the most commonly used. There are a number of ways to improve an individual's score, including repaying loans on time and keeping debt low. 

 

A credit score can significantly affect your financial life. It plays a key role in a lender's decision to offer you credit. People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score.

 

Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate, which results in their paying less money in interest over the life of the loan. Scores greater than 800 are considered excellent. While every creditor defines its own ranges for credit scores, the average FICO score range is often used:

 

·      Excellent: 800 to 850

·      Very Good: 740 to 799

·      Good: 670 to 739

·      Fair: 580 to 669

·      Poor: 300 to 579

 

How to Improve Your Credit Score 

When information is updated on a borrower’s credit report, their credit score changes and can rise or fall based on new information. Here are some ways a consumer can improve their credit score:

• Pay your bills on time: Six months of on-time payments is required to see a noticeable difference in your score. 
• Up your credit line: If you have credit card accounts, call and inquire about a credit increase. If your account is in good standing, you should be granted an increase in your credit limit. It is important not to spend this amount so that you maintain a lower credit utilization rate.
• Don’t close a credit card account: If you are not using a certain credit card, it is best to stop using it instead of closing the account. Depending on the age and credit limit of a card, it can hurt your credit score if you close the account. Say, for instance, that you have $1,000 in debt and a $5,000 credit limit split evenly between two cards. As the account is, your credit utilization rate is 20%, which is good. However, closing one of the cards would put your credit utilization rate at 40%, which will negatively affect your score.

The Bottom Line 

Your credit score is one number that can cost or save you a lot of money in your lifetime. An excellent score can land you lower interest rates, meaning you will pay less for any line of credit you take out. But it's up to you, the borrower, to make sure your credit remains strong so you can have access to more opportunities to borrow if you need to.