If you are interested in buying a home, you probably are going to need a mortgage loan. To get one, you need to understand your credit score and how it is arrived at.
A lender does not have the time to go through your credit and make a determination of whether you are a good loan risk or not. Instead, most lenders rely on your FICO score. The FICO score is a numeric representation of your overall credit. Here is how it breaks down.
Track Record – Many people inherently understand that their track record of paying back previous loans has something to do with their FICO score. What most do not realize, however, is how much. A full 35% of your FICO score is based on how you have met previous loan obligations. In fact, this is the most influential of all factors in determining your score!
Outstanding Debt – You may make payments on time, but it really will not help your score if you owe everything and the kitchen sink! Lenders have learned the rather basic rule that those who are in significant debt probably should not be given more money. If you want to improve your credit score, pay off as much debt as possible. This factor equates to 30 percent of your FICO score.
Credit History – As odd as it may sound, the number of years you have had credit plays a role in your FICO score. The longer the better. A long history shows a more reliable trend of activity, to wit, whether you pay your bills or not. This accounts for 15 percent of your score.
New Credit – A bad sign for many borrowers is an effort to suddenly acquire more credit. Why is it a bad sign? It often means that they are trying to come up with extra cash. If you are going to seek a mortgage, do not apply for any new credit cards for at least a year. This can affect your FICO up to 10 percent.
Category of Debt – Not all debt is treated equally. Lenders do not like credit card debt, but they smile at investment debt. What is investment debt? Car loans. Home loans. Education loans. All of these are for an investment in something tangible or of value. A shopping spree at the mall is not. Try to partition your debt as much in favor of these types of loans as this factor plays up to 10 percent of your FICO score.
The FICO score is often shrouded in the mists of mystery when discussed. In truth, it is pretty straightforward and simple. Now that you know the factors, work on improving yours. A great FICO score can save you tens of thousands of dollars on your mortgage.