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Summary: Everyone knows that you need a good credit score to get a loan, but how do you calculate a credit score? This article will explain more.
A good credit score will not only help you increase your chances of getting approved for a mortgage, but it will also help you secure a lower rate. But how do you calculate your score?
Let’s look first at what a credit score is. A credit score is a number that lenders use to determine whether they should offer you credit, and what interest rate you qualify for. Whether it’s a credit union, a credit card company, or a mortgage company, these lenders examine your credit report to learn how you’ve managed your finances in the past.
They will all want to be sure that you will repay your loan on time. In other words, they want to know your creditworthiness: your credit score assists lenders to determine the level of risk involved in lending you money.
Many factors can influence your credit score. The most common credit scoring factors on your credit report are:
Credit scores are a complicated subject. You might even find out that you have more than one type of credit score. Why? Let’s find out.
Credit scoring agencies use a proprietary algorithm to determine creditworthiness, but rely on the factors described above when making those calculations.
For example: The three major credit bureaus, Experian, Transunion and Equifax use the FICO algorithm, first introduced in 1989 and used by the majority of lenders. VantageScore, a newer model introduced in 2006, uses a different algorithm to create a more predictive and consistent rating system.
|FICO FACTORS||VANTAGESCORE FACTORS|
|Payment history: 35%||Recent credit amount: 30%|
|Outstanding debts: 30%||Payment history: 28%|
|Length of your credit history: 15%||Credit utilization: 23%|
|Types of credit you’ve used: 10%||Account balances size: 9%|
|Amount of new credit: 10%||Depth of the consumer’s credit: 9%|
|–||Amount of available credit: 1%|
You will also have a credit score with each of the credit reporting agencies: Equifax, Experian, and TransUnion. Your score with each of these agencies is most likely very similar, but there may be discrepancies. Some credit reporting agencies may not update their information as rapidly as others.
For example, if you have recently paid off a loan, it may appear in Equifax but not have been updated in Experian, thus giving you a lower credit score on Experian.
Each credit bureau has its own name for its credit scoring model, even though they all use the same FICO algorithm. Experian calls it “FICO or FICO II,” Equifax uses “Beacon,” and TransUnion’s model is named “Empirica”. To make thing even more complicated, there are specialized credit scores used by lenders for specific types of loans.
If you are applying for a car loan, for example, lenders look at your Auto Enhanced score which gives more weight to your auto loan payment history. So, if you paid your mortgage and credit card payments in full and on-time, but your car loan payment was always late, that will reflect negatively in your Auto Enhanced score.
Calculating your credit score does not have to be overwhelming. Doing a couple of simple tasks will get you on the way to your score.
First, you need to keep track of your credit report. Regularly checking your credit report with a program like CreditKarma.com does not reflect negatively on your overall score, and you can take action if you notice something out of place. Each credit bureau has their own online system used to clear up discrepancies, and they are required to respond within 30 days of a properly submitted dispute.
Start shopping for a mortgage lender well in advance of home buying. Discover which credit score your lender uses, and focus on that score. All mortgage lenders use Experian, Equifax and Transunion. Your mortgage lender can help you find the best way to calculate your score with each of these credit bureaus, and offer creative solutions to increase your over-all score before you apply for a pre-approval.
Speak with a knowledgeable mortgage planner today to put you and your credit score on the right track for the purchase of your dream home. Interest rates are currently the lowest they have been in over one year. Apply for your preapproval at Sammamish Mortgage now, to lock in the benefit of these lower rates.
If you have questions about mortgages or are ready to apply for one, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs with flexible qualification criteria. Contact us today with any questions you have about home loans.
It’s difficult to begin shopping around for a new mortgage without the facts on how this can affect your FICO score. Thankfully, not all credit checks are created equal and they do not affect FICO scores in the same way.
Summary: Credit scores are important indicators of a loan applicant’s financial responsibility and capacity to meet fiscal obligations. Income, employment history, assets held, and a house that meets lender guidelines are also essential to a successful application. When an insurance…