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Your credit score is extremely important when applying for a mortgage. Financial institutions rely less on personal ratios and reports as they had
in the past. In general, the higher the credit score, the quicker a mortgage may be approved. It is
important to check your credit history and score before requesting a
mortgage or refinancing. There could be errors on your credit history
that may delay approval of a mortgage. In a fast paced interest rate
market, one could possibly lose a lock on a favorable interest rate if a
mortgage application is significantly delayed.
The following is quoted from the Federal
Trade Commission web site concerning credit scoring:
What is credit
scoring?
Credit scoring is a system creditors use to help determine whether to give
you credit.
Information about you and your credit experiences, such as your
bill-paying history, the number and type of accounts you have, late
payments, collection actions, outstanding debt, and the age of your
accounts, is collected from your credit application and your credit report.
Using a statistical program, creditors compare this information to the
credit performance of consumers with similar profiles. A credit scoring
system awards points for each factor that helps predict who is most likely
to repay a debt. A total number of points--a credit score--helps predict
how creditworthy you are, that is, how likely it is that you will repay a
loan and make the payments when due.
Why is credit scoring used?
Credit scoring is based on real data and statistics, so it usually is more
reliable than subjective or judgmental methods. It treats all applicants
objectively. Judgmental methods typically rely on criteria that are not
systematically tested and can vary when applied by different individuals.
What can I do to improve my
score?
Credit scoring models are complex and often vary among creditors and for
different types of credit. If one factor changes, your score may change--but improvement generally depends on how that factor relates to other
factors considered by the model. Only the creditor can explain what might
improve your score under the particular model used to evaluate your credit
application.
Nevertheless, scoring models generally evaluate the following types of
information in your credit report:
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Have you paid your bills on time? Payment history typically
is a significant factor. It is likely that your score will be affected
negatively if you have paid bills late, had an account referred to
collections, or declared bankruptcy, if that history is reflected on your
credit report.
-
What is your outstanding debt? Many scoring models evaluate
the amount of debt you have compared to your credit limits. If the amount
you owe is close to your credit limit, that is likely to have a negative
effect on your score.
-
How long is your credit history? Generally, models consider
the length of your credit track record. An insufficient credit history may
have an effect on your score, but that can be offset by other factors,
such as timely payments and low balances.
-
Have you applied for new credit recently? Many scoring models
consider whether you have applied for credit recently by looking at
"inquiries" on your credit report when you apply for credit. If you have
applied for too many new accounts recently, that may negatively affect
your score. However, not all inquiries are counted. Inquiries by creditors
who are monitoring your account or looking at credit reports to make
"prescreened" credit offers are not counted.
-
How many and what types of credit accounts do you have?
Although it is generally good to have established credit accounts, too
many credit card accounts may have a negative effect on your score. In
addition, many models consider the type of credit accounts you have. For
example, under some scoring models, loans from finance companies may
negatively affect your credit score.
Scoring models may be based on more than just information in your credit
report. For example, the model may consider information from your credit
application as well such as your occupation, length of employment, or
whether you own a home.
Credit Bureaus
Federal Law Free Annual Report
www.annualcreditreport.com
Equifax
www.equifax.com
Experian
www.experian.com
Trans Union
www.transunion.com
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