It's true, when applying for a Loan Modification having a good credit score is not a requirement. In fact your credit score is not even used in determining if you qualify for the loan modification. However after your loan modification has been completed it is important that you reestablish your credit and build your score up.



So what is a credit score? You hear about it on the radio, television and in print. Simply put it is a tool that lenders use in determining if they are going to lend to you, and if so what interest rate they will charge you.

Before deciding on what terms a lender will offer you, lenders need to know two things about you. Your ability to pay back the loan and your willingness to pay back the loan. For the first, the lender will look at your income to debt obligation ratio (how much you owe compared to how much you earn). For the second the lender will look at your credit score.

The most widely used credit scores are FICO scores which were developed by Fair Isaac & Company Inc. Fair Isaac scores run from a low of 350 to a high of 850, the lower the score the higher the risk, the higher the score the lower the risk.

Credit scores only consider the information contained in your credit profile. It does not consider your income, savings, down payment amount or demographic factors like gender, race, nationality, or material status. By federal law it is illegal to consider gender, race, or nationality, and that is one of the reasons why credit scoring was invented. Credit scoring was developed as a way to consider only what is relevant to someone's willingness to repay a loan.

Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, and number of credit inquiries are all considered in credit scores. Late payments will lower your score, but establishing or reestablishing a credit record of making payments on time will raise your credit score. Having high credit balances on revolving credit accounts will also lower your credit score whereas having low balances will raise your score.

Different portions of your credit history are given different weight. Thirty five percent of your FICO score is based on your specific payment history. Thirty percent is your is your current level of indebtedness. Twenty percent is the time your open credit has been in use. Accounts open for five years or more are good, six months are not as good. Also the types of accounts that are available to you, installment loans such as auto and student loans verses revolving and debit accounts such as credit cards. Finally 15 percent is of new credit or credit score request also known as inquiries.

There are three major credit reporting agencies, Equifax, Experian, and Trans Union. They all use a slightly different system to arrive at a score. Experian uses the Fair Isaac model known as FICO, Equifax's model is called Beacon, and Trans Union's model is Emperica. While each model considers a range of data available in your credit report, the primary factors in determining your credit score are, Payment history (do you make your payments on time), Credit history (the length of time you have had open accounts), and Credit inquiries (the number of times you have had your credit checked).

Your credit report must contain at least one account which has been opened for six months or more, and at least one account that has been updated (used) during the past six months for you to get a credit score. These scores are used by lenders in determining whether or not you will qualify for a loan. If you do not meet the minimum criteria for having a score, you may need to establish a credit history prior to applying for a loan. The higher to score the better the risk, the better the risk the better the rate you will receive.