What is a Credit Score?
A credit score is a numerical value that lenders use to help them decide: “If I extend credit to this person, what is the risk that I won’t be paid back on time?” Simply put, credit scores help lenders predict the risk that the debt will not be paid as agreed per the terms of the loan. Lenders are able to assess risk more fairly by using credit scores because credit scores are consistent and objective. A lower credit score means more risk for the lender and may therefore result in a higher interest rate for the borrower.  There are different types of credit scores for different types of credit – 90% of the top mortgage lenders use FICO Scores.  FICO scores range from 300 (poor) to 850 (excellent).  In April 2022, the average FICO score in the US was 716.

What’s Considered in a FICO Score?
You should have 3 credit scores – one from each of the 3 major credit bureaus – Experian, Transunion, and Equifax.  Lenders will use your middle score, and if there are 2 borrowers on a loan, lenders will use the lower of the 2 middle scores.  Some borrowers with limited credit history may less than 3 scores.  If your credit history is shorter than 6 months of payments, then you probably won’t have a FICO score yet.

Credit scores are fluid numbers, changing as elements in your credit report change.  Most creditors report to the credit bureaus just once a month, so your credit report is a snapshot in time, based on the most recently reported information.  Credit scores are affected by various elements, including:

• Number and severity of late payments
• Type, number, and age of accounts
• Total debt
• Recent Inquiries
• Collections, Judgements, Bankruptcy and Foreclosure

Here is how various factors are weighted:

Payment History.
The repayment of past debt accounts for 35% of a score.

Amounts Owed.
The percentage of available credit being used/borrowed accounts for 30% of a score.

Length of Credit History.
The length of time all credit accounts have been open accounts for 15% of a score.

Credit Mix.
The diversity of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans accounts for 10% of a score.

New Credit.
The frequency one shops for new credit within a specific timeframe accounts for 10% of a score.

How Can You Improve Your Scores?
• Pay your bills on time
• Keep balances low on credit cards and other “revolving” credit. It is better to keep your current balance under 50% of the available credit limit, and even better to keep balances under 30% of your credit limit.  It is better to have several cards with low balances spread around than a few that are maxed out.
• Pay down revolving debt
• If your credit history is short, do not open a lot of new cards in a short period of time.
• Don’t close unused credit cards as a short-term strategy to raise a score. If the cards are closed, the scoring models may not use the positive payment history from those cards.

The Fair and Accurate Credit Transactions Act
The FACT Act was signed into law in 2003 in order to enhance the ability of consumers to combat identity theft, allow consumers to exercise greater control regarding the type and amount of marketing solicitations they receive, and to increase the accuracy of consumer reports. As part of this initiative, the three credit repositories, Equifax, Experian, and TransUnion, are each offering a free annual credit report to each consumer. Log on to www.annualcreditreport.com or call 877-322-8228 for more information.  One strategy you can use to monitor your credit is to pull just one of your free reports every 4 months.

You can and should resolve any errors you find directly with Equifax, Experian, and TransUnion. If the incorrect information is being reported by a creditor, then you’ll need to work with the creditor – you will want to be able to provide documentation that the . In many cases, writing to the creditor to explain your dispute may resolve the problem. You can find contact information for each of the three credit bureaus by clicking here.

Pre-Approval Meeting
One of the key reasons to meet with me in advance of when you want to purchase or refinance a home is that we can discover and attempt to resolve any potential credit issues before you actually need to apply for a loan, putting you in the best possible position to get a lower rate.

Here is some analysis of what your score means to a lender:

What’s Your Score?
800+      – Exceptional – you are way above the national average
– Congratulations – you qualify for the lowest cost of private mortgage insurance
740-850 – Congratulations – you qualify for the best possible rate
720-739 – Excellent
719        – the average score in the US as of April 2022
700-719 – Very Good
675-699 – Good
640-674 – Average
640 and under – indicates credit challenges, requires further scrutiny

Some Interesting Statistics
Score over 800 – 1 loan in 1292 will default
Score 700 to 719 – 1 loan in 123 will default
Score 500 to 600 – 1 loan in 8 will default

Likelihood of Default vs. a Score of 700
Below 620 – 18 times more
620 – 660 – 7 times more
660 – 700 – 2 times more

Score By Population
Above 780 – 20%
745 to 780 – 20%
600 to 745 – 20%
620 to 690 – 20%
Below 620 – 20%

The information provided on this page was compiled from various credit bureau websites, and the statistics may not be the most recent, but indicate how your credit score impacts the risk associated with extending credit to you.