Checked your credit score lately? No, then perhaps you
should. You will be applying for a mortgage in the near
future, which will enable you to complete your lease purchase
contract. Your credit score is the most important factor in
determining your eligibility, and obtaining a mortgage. It will
determine the interest rate you will receive on your loan, thus
the higher your score, the lower and more favorable your
interest rate. Let’s take a look at what goes into this all
important score.
The credit score, usually referred to as the FICO score, is a
number based on a formula developed by the Fair Isaac
Corporation. Fair Isaac looks at a summary of all of your
credit accounts (mortgage, credit cards, car payments, etc.) and
your payment history. By using these summaries and how you have
paid, Fair Isaac can calculate the probability of how you will
repay future debt. These probabilities (scores) are given
numerical assignments ranging from 300 to 850. The higher your
score the less of a risk you are to acreditor. For the best rates, a score of700 or above is desirable.
Fair Isaac calculates the score for each of the three big
credit-reporting agencies Equifax
Experian and TransUnion, using the information
supplied by each agency, thus sometimes you will note a slight
difference in the reporting scores.
How is your score determined?
35%
is determined by your payment history. Do you pay your bills on
time on a regular basis to any agency that reports to the credit
bureaus? This can include medical bills, fines, parking
tickets.
30%
is based on the amounts you owe each creditor, and how that
compares to total amount of credit available to you. The same
applies to any loans that you owe. In other words, do not max
out your credit cards.
15%
is based on the length of the credit history. How long you have
had these accounts and how long it has been since you have had
any activity on these accounts. The older accounts are better
as long as you have made timely payments.
10%
is based on how many accounts you’ve recently opened compared
with the total number of your accounts. Also the number or
recent inquires on your report by lenders to whom you were
applying for credit. This will lower your score. Too many
inquires may signal you are in financial trouble. If you are
searching for a mortgage or car loan, inquires made within a 6
week period should not adversely affect your score. “But every
inquiry you trigger when you apply for a credit card can affect
your score,” says Craig Watts, a spokesman for Fair Isaac.
10%
is based upon the type of credit you use. An installment loan
like your mortgage which has a fixed monthly amount and
demonstrates you can handle large debt. Your handling of
revolving debt carries more weight since the payments change
from month to month and seems to be predictive of your future
behavior. It is advisable to pay off these cards each month and
keep a low balance.
Part Two of Credit Scores: Improving and Monitoring Your
Credit Score, coming in the April edition of the Purchase
Review
