SolveYourProblem
Home Loan & Home Mortgage Article Series
How
Your Credit Score Matters:
Lending Institutions
Ever
wonder just how far-reaching your credit score really is? The short answer: very. Your FICO credit score
affects nearly all of your financial dealings, from the annual
percentage rate that you pay on your credit card to whether
you are able to purchase a cell phone.
Your
credit score is of particular interest to lending institutions. Nearly 75 percent of all lenders assess your credit score when
determining whether to grant a loan. If you plan on ever buying
a house and car, or purchasing car or homeowner’s insurance,
expect lenders to examine your credit score very carefully.
A bad credit score will make most lenders think twice—they
don’t want to lend to individuals who appear to be a risky
proposition. A bad credit score could keep you from getting
that dream house or purchasing a new car, and could even threaten
the possibility of getting a job. So what’s the easiest way
to ensure that you’ll be approved for a loan? Become familiar
with your credit report and score. The more you learn about
your credit score, the less likely you’ll be of becoming a
risky proposition.
Why
all the fuss over a simple three-digit number? Examining
how your FICO credit score is calculated may provide insight
into why some lenders may choose to deny your loan application.
Your FICO score (FICO, by the way, stands for Fair Isaac Company—the
institution that created and compiles the score) is calculated
using several data pulled from your financial records. These
include: the number and types of credit cards you use, your
payment history, the amount of money you owe, the number of
years you’ve had a history on file, and whether you have any
new credit.
Which
of these things carries the most weight in determining
your credit score? Approximately 35% of your credit score is
determined by your payment history. Your payment history refers
to a number of factors, including the different types of payments
you regularly make (examples of payments include standard major
credit cards, department store credit cards, mortgages, and
car loans), and whether you have missed or paid late on any
payments. Included in your payment history is information regarding
any bankruptcies, liens, judgments, foreclosures, wage garnishments,
or law suits that have been recorded. If your payment history
reflects that you don’t have much debt and usually pay your
bills on time, you can expect your credit score to reach into
the upper brackets. Conversely, if your payment history reflects
a pattern of missed or late payments, and you have a significant
amount of outstanding debt, you can expect your credit score
to be much lower.
Another large chunk of your credit score is determined by
the total amount of debt you carry. This includes all the amounts
you owe on different credit card accounts, as well as installment
payments such as car or student loans. Also of importance is
the different kind of debt you carry, such as credit card debt
versus mortgage and car loan payments. If you carry a lot of
debt on a high-interest, long-standing credit card account,
you can expect this scenario to hurt your credit score significantly.
Another scenario, however, could have a much different effect
on your credit score. For instance, an individual who pays
a lot, mostly due to their mortgage payment, will likely have
a higher credit score than a person who pays a lot because
of debt on their credit card.
Now that you have a better idea of how your credit score is
calculated, you can understand why lending institutions may
be wary in lending to individuals or small business with a
low credit score. Lenders can interpret a low credit score
to mean that you have a high amount of outstanding debt and
a history of missing payments (or both). Unfortunately, even
if you are approved for a loan, chances are that a low credit
score will saddle you with very high interest rates. Before
you approach a lender, be certain you know your credit score.
This gives you the opportunity to clear up any discrepancies
or inaccuracies that may be on your credit report before your
score is scrutinized by lenders.
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SolveYourProblem.com : 2007
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