Five Areas of Your Credit Score and How It Can Affect Your Loan Application

Did you know that the National FICO average score is above 740?  This score is determined by a three digit number and measures the risk associated with lending.  This is called your FICO score.  The higher the score, the easier it will be to receive a better rate and approval from lenders.  A vast majority of lenders will utilize this score to help with making their decisions.  Certain bureaus (such as Experian, TransUnion, and Equifax) will use certain avenues to determine your score, but mostly it consists of the listed categories denoted below: 
 
1)  Payment History – When bills are delinquent, late or past due such as your rent, hospital bills, utility bills, cell phone, car payment, etc. this could negatively affect your credit score.  The longer your bill goes outstanding without payment the lower your score could go.  Any missed payments could reduce your score up to 110 points and could remain with your credit history for up to 7 years.  Also, any bankruptcies, foreclosures, short sales, civil judgments, repossessions or tax liens could negatively affect your approval and/or your FICO score.  Payment history constitutes the highest majority of your credit score of about 35%.  It is very important to maintain the BEST score within this category. 

2)  Credit Utilization – Another factor that lenders keep a stringent eye on is your credit utilization rate.  The higher your credit utilization rate the more risk you pose towards the lender.  This is calculated by the current use of your credit divided by your available credit.  When lenders see that your rate is high it concerns them that you may be overly extended and may not be able to pay back a loan.  A good tip to keep in mind is that if your utilization is less than 30% on each of your cards then you are more likely to receive a higher FICO score.  If any of the above cards are above this percentage, there may be some questions asked by your lender that may require justification.  Credit utilization may constitute of up to 30% of your FICO score. 

3)  Credit Account Length – Your credit score contains accounts that are currently open.  The longer that you have had accounts open the higher your FICO score could be.  With helping determine a higher FICO score all accounts that have been opened with an average of ten years will be advantageous.  One important factor is to keep your credit cards open and active!!  On occasion, swipe that credit card that you have not used in quite some time.  If not, the card could be automatically closed and go inactive.  This could affect your credit utilization rate and the average age of your accounts which could potentially reduce your FICO score.  On the other hand, DO NOT OPEN ANY NEW CREDIT CARD ACCOUNTS when applying for a loan, for this may skew your score.  This category consists of 15% of your FICO score. 

4)  Credit Type – Having a mix of different types of accounts generally demonstrates more consistency with re-paying of debt.  Demonstrating that a variety of accounts such as a car loan, credit cards, home loans, business loans or home equity line of credit.  Do not open accounts just to do so, for this may affect your account averages and reduce your score.  This category consists of 10% of your score.

5)  New Credit Accounts – Applying for a new line of credit (like opening up a new credit card or applying for a car loan) will generally result in a hard hit inquiry on your credit score.  Multiple hard hit inquires may suggest to lenders that you are desperate for money and that you may not be able to be approved by lenders.  Shopping around for a better rate is normal for mortgages and car loans and at times you may not feel the affect until 14 to 45 days later.  Be aware that you score may drop, but can be easily justifiable.  This category consists of 10% of your score. 

Now that you know what consists of your credit score, give me a call today with how we can get you setup with a lender with what the best path would be for your current situation and discuss with how to improve your score, if necessary, before applying for a home loan application.

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