The Loan Application: Credit Report and Score
Most lenders use the system of credit scoring created by the Fair Isaac Corporation, commonly known as FICO. Under the FICO system, your credit score can range anywhere from 301 - 850, with anything over 740 considered an excellent score. Lenders reserve the best loans and lowest rates for customers with excellent credit.
Tip!
There are three companies in the US that are commonly used to calculate FICO scores: Experian, TransUnion, and Equifax. Your score may vary somewhat among these three companies; they use slightly different methods to calculate your score. You can check your scores by visiting MyFICO. You'll pay about $15 per score.
Lenders have different methods for averaging out your different FICO scores. They may average the highest and lowest scores, the two lowest scores, or the two highest scores. Ask your lender what method she uses.
Though you may be asked to provide credit information on your loan application, your lender or broker will pull your credit score himself.
Tip!
When shopping different lenders, move quickly. Multiple credit checks over a long period can lower your credit score by several points. If all the inquiries take place in a single 30-day period, they'll be considered as one credit-shopping event, which lessens the impact to your score. If you spread your lender-shopping out over a longer period, your credit score will take more damage.
Your score is calculated based upon the following factors in your credit history, as documented by the Federal Citizen Information Center (FCIC):
Components of Your Credit Score
The elements that comprise a credit score. Payment history and amount owed have the biggest impact.
- Your payment history (35% of your FICO score): Have you paid your credit accounts on time? Late payments, bankruptcies, and other negative items can hurt your credit score. But a solid record of on-time payments helps your score.
- How much you owe (30%): FICO scores look at the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.
- Length of your credit history (15%): A longer credit history will increase your score. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.
- New credit (10%) : If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your rate shopping within a focused period of time, such as 30 days, to avoid lowering your FICO score.
- Other factors (10%): Several minor factors also can influence your score. For example, having a mix of credit types on your credit report – credit cards, installment loans such as a mortgage or auto loan, and personal lines of credit – is normal for people with longer credit histories and can add slightly to their scores.
If your credit score is hurting your ability to qualify for the mortgage you want, here are a few steps from the FCIC you can take to repair the damage:
- Pay your bills on time: Delinquent payments and collections can really hurt your score.
- Keep balances low on credit cards: High debt levels can hurt your score.
- Pay off debt rather than moving it between credit cards: The most effective way to improve your score in this area is to pay down your revolving credit.
- Avoid overextending yourself : Apply for and open new credit accounts only when you need them.
- Check your credit report regularly for accuracy: Contact the creditor and credit reporting agency to correct any errors.
- If you have missed payments, get current and stay current: The longer you pay your bills on time, the better your score.