How Your Credit Score Does Matter!
Did you ever wonder just how far-reaching your credit score really
is?
The short answer: very. Your FICO credit score affects almost all of your
financial dealings, from the annual percentage rate that you pay on your
credit cards to something as menial as whether you are able to purchase a
cell phone.
Your credit score is of particular interest to mortgage lenders.
Nearly 100 percent of all mortgage lenders assess your credit score when
determining whether to grant you a mortgage. If you plan on ever obtaining
a mortgage, purchasing car or even acquiring homeowner's insurance, expect
lenders to examine your credit score very carefully. A bad credit score
will make most mortgage lenders think twice-they don't want to lend to
individuals who appear to be a risky proposition. A bad credit score could
keep you from getting a mortgage for that dream house, purchasing a new
car, and could even threaten the possibility of getting a job. So what's
the easiest way to ensure that you'll be approved for a mortgage or loan?
Become familiar with your credit report and score. The more you learn
about your credit score, the less likely you'll be of becoming a risky
proposition.
Why all the fuss over a simple three-digit number?
Examining how your FICO credit score is calculated may provide insight
into why some lenders may choose to deny your mortgage application. Your
FICO score (FICO, by the way, stands for Fair Isaac Company-the
institution that created and compiles the score) is calculated using
several data pulled from your financial records. These include: the number
and types of credit cards you use, your payment history, the amount of
money you owe, the number of years you've had a history on file, and
whether you have any new credit.
Which of these things carries the most weight in determining your
credit score?
Approximately 35% of your credit score is determined by your payment
history. Your payment history refers to a number of factors, including the
different types of payments you regularly make (examples of payments
include standard major credit cards, department store credit cards,
mortgages, and car loans), and whether you have missed or paid late on any
payments. Included in your payment history is information regarding any
bankruptcies, liens, judgments, foreclosures, wage garnishments, or law
suits that have been recorded. If your payment history reflects that you
don't have much debt and usually pay your bills on time, you can expect
your credit score to reach into the upper brackets. Conversely, if your
payment history reflects a pattern of missed or late payments, and you
have a significant amount of outstanding debt, you can expect your credit
score to be much lower.
Your credit score is also largely determined by the total amount of
debt you carry.
This includes all the amounts you owe on different credit card accounts,
as well as installment payments such as car or student loans. Also of
importance is the different kind of debt you carry, such as credit card
debt versus mortgage and car loan payments. If you carry a lot of debt on
a high-interest, long-standing credit card account, you should expect this
scenario to hurt your credit score significantly. Another scenario,
however, could have a much different effect on your credit score. For
instance, an individual who pays a lot, mostly due to their mortgage
payment, will likely have a higher credit score than a person who pays a
lot because of debt on their credit card.
Now that you have a better idea of how your credit score is calculated,
you can understand why mortgage lending institutions may be wary in
lending to individuals or small businesses with low credit scores.
Mortgage lenders can interpret a low credit score to mean that you have a
high amount of outstanding debt and a history of missing payments (or
both). Even if you are approved for a mortgage, chances are that a low
credit score will saddle you with a very high interest rate. Before you
approach a mortgage lender, be certain you know your credit score. Knowing
your credit score first gives you the opportunity to clear up any
discrepancies or inaccuracies that may be on your credit report before
your score is scrutinized by mortgage lenders.
