CREDIT…KNOW THE SCORE!

How credit scores affect mortgage rates,

Each of the two major credit bureaus, Equifax and TransUnion, collects data from your lenders about your history of borrowing and paying back credit. They compile that information into your credit report, which any lender can access whenever you apply for a loan. They take the information from those credit reports, apply their own trade-secret formula and, based on the two credit reports, distill two credit scores for you into one score ranging from 300 to 850. The higher the score is, the less likely you are to default on their loan.

The FIVE Factors
What the credit scoring model seeks to quantify is how likely the consumer is to pay off their debt without being more than 90 days late on a payment at any time in the future. This score comprises five factors.
They are listed in order of importance:

1. Payment History: 35% impact on your score.

Paying debt on time and in full has a positive impact. Late payments and judgments have a negative impact. Missing a high payment has a more severe impact than missing a low payment.

2. Outstanding Credit Balances: 30% impact on your score.

The ratio marking the difference between the outstanding balance and the available credit is important here. Once the balance is close to 75% of the limit it starts to really impact your score.

3. Credit History: 15% impact on your score.

This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area.
4. Type of Credit: 10% impact on your score.

A mix of auto loans and credit cards is more positive than a concentration of debt from credit cards only.

5. Inquiries: 10% impact on your score.

This quantifies the number of inquires that have been made on a consumer’s credit history within a six-month period. Each hard inquiry can cost from two to 50 points on a credit score but the maximum number of inquires that will reduce the score is 10. Eleven or more inquires within a six-month period will have no further impact on the borrower’s credit score.

One thing that is important to remember is that a computer that’s not taking any personal factors into consideration calculates these scores. When a credit report is run, it is simply today’s snapshot of your credit profile. This can fluctuate depending on your own activities. When you enter into the loan process, it’s not in your best interest to go out on a shopping spree. You need to make sure you are not creating a negative impact on your score while the lender is reviewing it.

Factors beyond credit scores
While scores are important, they are not the only thing lenders take into consideration when approving a mortgage. And low scores aren't insurmountable obstacles.

Other offsetting factors can balance a low credit score, such as a large down payment, large cash reserves or an overall low debt-to-income ratio. The important thing is that borrowers not assume they can't get a mortgage because of a low credit score, or that they limit their loan search to lenders that specialize in loans to people with troubled credit.

Conversely, some clients think they are doing them-selves a favor by having fewer credit cards and start to close existing credit card accounts even if they are at a zero balance. This may not be the case as you may lose out on the credit history factor. Even if your credit cards don’t have a good interest rate, you are rewarded for having long-term credit history, which has a 15% impact to your score as noted above.