The Truth about Credit Scores

Your credit score reflects how you’ve managed credit in the past. It affects how much credit, the interest rate, and other loan terms that are available to you now and in the future.  

When you apply for credit (for a credit card, auto loan, mortgage, etc.), lenders evaluate how much risk they are taking by loaning money to you. To do this, they look at your credit report from one of the three credit reporting agencies — Equifax, TransUnion, and Experian. (For mortgage purposes, we pull information from all three.)

Credit scores range from 30 to 850 (the higher the score, the better). These scores are often referred to as FICO scores, so-called because the software used by most credit bureaus was created by Fair Isaac and Company, or FICO. 

 What affects your FICO score?

  • Payment history (represents 35% of your score). Delinquent payments and collections can really hurt your score. Fortunately, the longer you pay your bills on time and stay current, the better your score will become. How you handle any debt, even debt you pay off, stays on your report for seven years.  
  • Amounts owed (represents 30% of your score). With financial discipline, you can improve your score by reducing the amount you owe on credit cards and revolving credit. Be aware that, in the short term, closing unused credit cards will not improve your credit score. 
  • Types of credit use. Apply for and open new credit accounts only as needed. Opening new accounts just to have a better credit mix probably will not raise your credit score.  
  • Length of credit history. It is important to have credit cards as a way to establish a history of how well you manage credit.  (Someone with no credit cards tends to be a higher risk than someone who has managed credit cards responsibly.) That said, if you have been managing credit for a short time, do not open multiple new accounts too rapidly. Doing so lowers your average account age, can negatively impact your score, and look risky to creditors. 
  • New credit. If you’re rate shopping for a mortgage, do so within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. All credit inquiries reflected on your credit report must be explained for your new mortgage.


Checking Your FICO Score

These days, many companies beckon you to purchase your credit score online. But please note: Their score may not be your true FICO score. If you are seeking a mortgage, your credit report must be ordered by your lender and is included in your closing costs there is no need for you to pay for a separate report.

That said, we do recommend checking your credit score annually through a free credit report service where you can review your current debt and substantiate the accuracy of the report.

If you find any error on your credit report, you may dispute them with the credit bureau and reporting agency. However, most mortgage lenders require that no items on a credit report be in dispute. If you are in the process of getting a mortgage, please speak with your lender before lodging a dispute with the credit bureau. This will help avoid a delay in your mortgage approval.


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