A credit score is based on information in your credit report, including information about how you have handled debt and credit accounts in the past. The calculations that make up a credit score are developed by looking at the way millions of consumers manage their credit. Credit scores have proven over time to be a reliable indicator of whether or not a consumer would repay a loan. A score is determined by summarizing a number of factors in your credit report. These include:



PAYMENT HISTORY. How have you paid your debts? How often have you paid your bills after they were due? How you paid your bills in the past gives the lender some indication of how you can be expected to pay them in the future. If you have a record of paying your bills after the due date, this can lower your score. How often you have been late paying your bills, how recently your payments have been late as well as how long you remained delinquent on any bill at one time are important factors.

OUTSTANDING DEBT.

How many consumer loans and open charge accounts do you have? What are the current balances on these accounts? The lender wants to know how much credit you have and how much you have used. Research has shown that the number of credit accounts you have as well as how much of your available credit is used is important.

CREDIT HISTORY. How long have you had credit? Generally, the longer you have had and have successfully managed credit, the higher your credit score. However, people with relatively new credit histories or those with only one or two accounts can obtain high scores as well.

If you have recently established credit or have only a few credit refer¬ences, which does not mean that you cannot get a mortgage. Working with your mortgage lender, you may be able to establish a “nontraditional" credit report that is based on how well you have paid other types of debts, such as rent and utility payments.

CREDIT INQUIRIES. How many times have you authorized a lender to check your credit record? How many new accounts have been opened recently? Every time you apply for credit for an automobile or con¬sumer loan, to open a new charge account, etc. the lender checks your credit history with one of the credit bureaus. This is called an "inquiry" and is recorded in your credit report. Sometimes, having many inquiries within a recent period on your file indicates that your credit usage may be increasing and creates an additional level of risk for the lender. However, don't worry that checking with several lenders about a mortgage loan will have a negative effect on your credit score. The credit report data used to calculate credit scores does not include auto or mortgage loan inquiries that occur in the 30-day period prior to the score being calculated, and auto and mortgage inquiries that occur in any 14-day period are always considered one inquiry.

TYPES OF CREDIT. What types of credit do you have in use? Do you have a mixture of types of credit, such as credit cards, personal loans, etc.?

Your credit score is calculated based on your history in these and other areas. Having established credit, paying your bills on time, and keeping the balances on open accounts to moderate levels will help ensure that you have a strong credit history and a good score.

Are credit scores discriminatory? No. Credit scoring is an objective process, based only on the infor¬mation in your credit report. Factors such as age, race, religion, gender, national origin, marital status, income, employment, and where you live are not considered in determining your credit score. Credit scoring is a bias-free tool that helps lenders evaluate the likelihood that you will repay the loan based on how you have managed debt in the past. Because credit scoring evaluates the information in credit reports in the same objective manner, one borrower is just as likely as another to have a high credit score.

What's my score? Is that good or bad? Credit scores typically used in mortgage lending range from approxi¬mately 300 to 900. Generally, the higher your credit score, the less risk of future default you represent to the lender. This is a strong indica¬tion that you have successfully managed credit in the past and are likely to repay a mortgage loan.

Keep in mind that your credit score is only one factor that the lender uses to evaluate your mortgage loan application and that the final decision whether or not to approve your mortgage loan is made by the lender after careful analysis of all of the information the lender has collected.

Can my score be improved? The answer is, over time, certainly. But it may be difficult to immediately "fix" your credit score. The most effective way to make sure that you have the best possible credit score is to manage the credit you already have in a responsible manner. You can do this by following two simple rules.

1. Avoid becoming delinquent on any of your credit obligations (credit cards, automobile loans, or other installment loans).

Consumers occasionally miss a payment on one of their bills. This can happen for any number of reasons. Isolated situations like these, although they should be avoided and will have some effect on your credit score, should not have an effect on your ability to get new credit.

A mortgage foreclosure on your credit report will have a major effect on your credit score and your ability to get new credit in the future.

2. Avoid overuse of your credit cards and other credit accounts.

Just as it is important for you to pay your bills on time, it is also important that you control how much money you owe, especially on your credit cards. Lenders are increasingly concerned about the credit risk of consumers who seem to overextend themselves by using most or all of their available credit even if these consumers are still making payments on time.

Why would the lender need to be concerned if you still are making your payments on time? In recent years, there have been many news accounts of people in financial difficulty because they have used their credit cards up to their maximum limits and then struggled to make their monthly payments. For some consumers in this situation, the burden of these monthly payments becomes so great that they stop making payments altogether. Some file bankruptcy. This can happen to people who have never before missed a payment.

So, while you may think everything is fine no matter how much you charge, as long as you can pay your monthly bills on time, the fact is that you are actually a higher credit risk than those that manage their credit accounts more conservatively.

Credit scores are developed by looking at the way millions of consumers manage their credit and are able to identify consumers who are becoming overextended, before they become delinquent. This risk is reflected in the credit scores of those consumers.