SolveYourProblem
Home Loan & Home Mortgage Article Series
5
Facts Credit Scoring Lenders Consider
Are you thinking of buying a house or a new
car? If you’re like most people, you’ll probably have to secure
a bank loan. When it comes to money lending, most financial
institutions strive to live by maxim of ‘only good credit need
apply.’ Yes, there are lending institutions that will lend
to individuals or businesses with very low credit scores (known
as ‘bad credit loans’), but these loans often come at a high
price. These types of loans frequently come with very high
interest rates and exorbitant fees that can end up costing
consumers much more than the original purchase. Even if your
credit score is not necessarily bad, but just ‘so-so’, chances
are you’ll end up paying a lot more than a person with very
good credit.
So what exactly do lending institutions consider good credit?
Good credit is based on your credit report and the accompanying
three-digit FICO credit score.
Your FICO credit score is based on a number of factors, including:
1)
Your payment history. This includes whether you have missed
any payments, or paid late. Payment history also involves the
different types of payments (car, house, different credit cards,
etc…) you make each month. Roughly 35% of your credit score
is determined by your payment history. A person with good credit
probably has a consistent record of paying on time each month
over a long period of time, with little or no missed payments.
2)
The amount you owe on all your different accounts. Do you
have dozens of accounts carrying high balances? Are most of
your credit card accounts maxed out? Or can most of your debt
be traced to one or two accounts, such as your mortgage and
car payments? Good credit is hard to attain if you carry balances
on many different accounts. A person with good credit probably
only carries balances on one or two accounts.
3)
The length of your credit history. This refers to whether
you have established sufficient history to provide an accurate
portrait of how you manage your finances. Lending institutions
want to know whether you have a history of paying on time.
Keep in mind that even if you have managed your credit perfectly,
if your account is only a year old, it probably won’t raise
your credit score immediately. Keep it up for a few years,
however, and watch your credit score soar.
4)
Types of credit. Another factor used in calculating your
credit score involves the types of credit you use. Different
kinds of credit include credit cards, mortgages, and installment
loans such as car and student loan payments. If the type of
credit you most commonly use weighs heavily on credit cards
and other high-interest credit sources, your credit score will
probably suffer.
5)
New or recent credit history. The last factor used to calculate
your credit score has to do with your recent credit history.
This includes any new credit accounts you may have opened,
whether you’ve made requests for new credit, and how you’ve
recently managed all of your credit. If you decide to open
several new accounts at once, be warned that this may hurt
your credit score. A person with good credit most likely does
not open new accounts frequently, but rather has a long history
with a few accounts that are in good standing.
Now that you have an idea of what good credit looks like,
how can you improve your chances of getting a loan if your
credit is less than stellar? First, obtain a copy of your credit
report. Your report is available from any of the three major
credit reporting bureaus—Experian, Equifax, and TransUnion.
By law, you can obtain a free copy of your credit report once
a year, but additional copies will cost you approximately $13.
Review your credit report carefully and contact the credit
bureau if you spot any errors or omissions (be prepared to
provide documentation).
Remember that so much of your credit score depends on your
payment history. The importance of paying your bills on time,
every month, cannot be stressed enough. Many banks offer you
the option of scheduling automatic payments each month. Make
use of these, if your financial situation allows. Also, don’t
open new credit accounts if you don’t intend to use them, and
don’t open and close accounts frequently. Instead, focus on
using responsibly the accounts you already have. This alone
will raise your credit score, and make you much more likely
to get best loans from lending institutions.
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