Your credit scores are numbers derived from your history of consumer credit. Mortgage lenders use your credit score to determine how likely you are to default on your mortgage loan. Homeowners with high credit scores get better mortgage interest rates than those with low credit scores.
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that can save you thousands of dollars on your next home loan.
Credit scoring has been around for years; however, computer generated scores have replaced manually generated scores. Credit scores have been widely used for instant approval on credit cards but are relatively new for approving mortgage loans. The most common credit score in use today the FICO score, which is generated by the Fair Isaac Corporation. FICO is the credit score used by the three major credit agencies Experian, Equifax, and Trans Union.
While all three credit reporting agencies use FICO’s scoring, they almost always come up with different scores based on the contents of their own records. Credit scores vary from one agency to the next because they pull credit activity from different parts of the country and collect different information. FICO credit scores range from 300 to 850. You’ll probably never see a credit score higher than 810. Anyone with a credit score higher than 720 is generally considered to have excellent credit. Good credit scores start in the neighborhood of 620 and a FICO score below that is considered to be poor.
How is your credit score generated? Fair Isaac looks at your credit reports and assigns your credit score based on several factors. Your history of making payments on time accounts for 35 percent of your credit score. The amount of outstanding debt you carry determines 30 percent of your score, and the amount of available credit you have factors into the remaining calculation. Available credit is viewed as the “potential for debt” and can have a detrimental affect on your credit score.
How does your credit score affect your mortgage interest rate? You can learn this and strategies for boosting your credit score in the video segment titled “Your Mortgage & Your Credit.” Register for our free mortgage tutorial to learn more.