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"How Lenders Use Your Credit"
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Article: "How Lenders Use
Your Credit"
By Andre Plessis
"How Lenders Use Your Credit"
What is FICO Score?
FICO is a mathematical model created by the Experian credit bureau as a tool for lenders to use in evaluating the risk associated with lending you money. FICO stands for Fair Isaac Company, the company that created the original scoring model. Similar models have been programmed by the other credit bureaus (Equifax) but they are all referred to as FICO scoring.
How is my Score Calculated?
Your score is calculated by a series of questions based on both your credit report & debt-to-income ratio. Each answer accumulates a certain number of points that are then added together for your final score. A typical scoring considers:
How long youve lived at your current address
Your job or profession
Your financial obligations (debt-to-income ratio)
Any late payments
The amount of credit you have outstanding
The amount of credit you are using
The amount of time youve had credit established
Your payment history payment history on credit cards, retail accounts at stores, installment loans, and mortgages. 35% of total score
Amounts owed. What is important is how many accounts have balances and how much of the total credit line is being used on credit cards and other "revolving credit" accounts. 30% of total score.
Length of credit history. Thats why parents should help children establish credit histories before they go out on their own. 15% of total score.
New credit. Applying for too much new credit is one of the easiest ways for people to inadvertently harm their credit score. (10% of total score)
Types of credit. This takes into account your mix of installment loans, mortgages, retail accounts, credit cards and finance company accounts. (10% of total score)
What do FICO scores ignore?
Your race, color, religion, national origin, sex, or marital
status.
Your age.
Your salary, occupation, title, employer, date employed, or employment
history.
Where you live.
Any interest rate being charged on a particular credit card or other account.
Certain types of inquiries (such as promotional, account review, insurance or
employment-related inquiries).
Credit counseling.
Any information not found in your credit report.
Any information that is not proven to be predictive of future credit
performance.
 | Number of accounts paid as agreed |
| Negative public records or collections |
| Delinquent accounts: |
| Total number of past due items |
| How long you've been past due |
| How long it's been since you had a past due payment |
| How much you owe on accounts and the types of accounts with balances |
| How much of your revolving credit lines you've used looking for indications you are over-extended |
| Amounts you owe on installment loan accounts vs. their original balances to make sure you are you paying them down consistently |
| Number of zero balance accounts |
| Total length of time tracked by your credit report |
| Length of time since accounts were opened |
| Time that's passed since the last activity |
| The longer your (good) history, the better your scores |
| Total number of accounts and types of accounts (installment, revolving, mortgage, etc.) |
| A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards) |
| Number of accounts you've recently opened and the proportion of new accounts to total accounts |
| Number of recent credit inquiries |
| The time that's passed since recent inquiries or newly-opened accounts |
| If you've re-established a positive credit history after encountering payment problems |
| In general, checking to make sure you aren't attempting to open numerous new accounts |
Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren't included in the report, such as income, employment history and the type of credit you are seeking.
Credit scores range from 350 to 850. The higher your score, the less risk a lender believes you will be.
Borrowers with a credit score over 700 are typically offered more financing options and better interest rates, but don't be discouraged if your scores are lower, because there's a mortgage product for nearly everyone.
Your bank will pull credit reports and scores from all three major credit reporting agencies: Transunion, Equifax and Experian. They'll probably use the middle score to work your loan application. Ask your lender to explain which credit scores will be used and how they affect your loan application.
What Lenders Look For
Before creditors lend money, they need to be assured that the funds will be repaid. In other words, is the prospective borrower creditworthy?
Income & Expenses
Lenders will look at what you earn and your monthly expenses, such as rent, utilities, personal loans, and other ongoing items. The amount left tells them whether you can afford to take on any additional debt.
Assets
Do you have assets that can serve as collateral? Lenders will look for things like bank accounts, savings account, life insurance, cars, stock/bonds, 401K and valuable items such as a house, if you own one.
Credit History
How do you manage debt? If you have credit cards or have borrowed money before, you have a history that shows prospective lenders whether you are creditworthy by revealing details about the amount of debt you already have, how many credit cards you have, and whether you make payments on time.
It's easy to qualify for credit if you have a good credit history, but what if you have never used credit before? This is a common problem for people who just started working, those who work in the home, people who always pay in cash, and those who do not have assets or accounts in their own names. For them, the first step is to establish a credit history.
Common Reasons for Denying Credit
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Too little time in current job |
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Too little time at current residence |
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Too much outstanding debt |
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Unreasonable purpose for requesting credit |
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Cosigner cannot take on additional debt liability |
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Errors on applicant's credit report |
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Strict creditor's standards |
In general, creditworthiness must be determined on the basis of criteria that relate to your ability and willingness to repay the debt. You cannot be denied credit based on your sex, marital status, race, religion, national origin, age, or dependence on income from public assistance.
If you are denied credit, the creditor must provide you with a written statement of the action and your rights, as well as the reason for denial or how to request the reason.
Improving Poor Credit
If you have fallen behind in your
payments, begin immediately to repair your credit record. Here's how:
Face up to the problem. Recognize that you are overextended, and contact your
creditors to see if they will set up a new payment schedule that you can
maintain. Don't ignore your bills.
Immediately stop using your credit cards.
Consider consolidating debts. You may find it easier to make a single payment rather than several. You might also get a lower interest rate that will make it easier to keep up with payments. Remember that debt consolidation is not a cure-all. You have to learn to control your spending to avoid future debt.
Don't expect miracles. Don't believe companies that promise to fix a poor credit rating quickly and painlessly for a fee. We recommend that you do not use companies who claim they can "repair" your credit history for a fee (which can run $500 to $1,000). They often use questionable tactics (such as flooding a credit reporting bureau with letters) which are generally ineffective factual information on bad debts stays on your record, period. (In fact, a new law from the Federal Trade Commission targets credit repair firms which don't do what they claim. The Credit Repair Organizations Act, which amends the Truth in Lending Act, bars them from taking money up front, mandates that they inform you of your legal rights, and says they must spell out the terms of their contract, which you can cancel within three days.)
Andre Plessis
Andre Plessis
"The Mortgage Guru"
"A Mortgage Professional
whose primary goal is to provide the expertise, guidance and skills necessary to
obtain the best mortgage to meet your personal needs".
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P.S. If you are at all intimidated or unsure about the mortgage process if you dont understand how to evaluate your options in getting a mortgage loan our 15 key questions will help you feel comfortable that you are making the best decisions. Also if you are in the process of refinancing your home with anyone, CALL ME and I will let you know if you are being offered the best loan option based on market conditions and your financial situation.
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