Monday, April 9, 2012

What makes up your credit score or fico score?

Your credit score, as I am sure you know by now, determines the interest rate on any type of credit you apply for.  Doesn't matter if it is a credit card, auto loan, or home loan.  In fact if you apply for a mortgage it will determine not only which loan you may or may not qualify for, it will also determine how much money you will have to pay down.

We can use a FHA home loan as an example.  Until recently FHA Guidelines did not consider credit scores, only history.  FHA changed that last year, in that if your score is 580 or less you have to put 20% down.  However, that was really a waste of paper because regardless of the FHA guidelines, you will probably not be able to find a lender that will make you a FHA loan if your score is less than 620. 

The FHA guidelines are "minimum acccepted by FHA".  The lender has the authority to set their own guidelines as long as it is above the min.  Saying that they are very conservative in today's market is an understatement.  This principle applies to USDA, VA, Fannie, Freddie or any other loan on the market.

So, ... that is why it is important that you understand what makes up your credit score and how you should manage it.

Your credit score, from 300 to 850, shows if you have a history of financial stability and if you are responsible with your credit management. There are three credit repositories that calculate credit scores that are based on the information in your credit file.  They are: Experian, Equifax and TransUnion.

Your credit score is also called a FICO score.  Each company will report a slightly different score, but they should all paint a similar picture of your credit history and how you manage it.  Listed below are the 5 major areas or concerns that determine what that score will be and what percentage they play in the score calculation.
  • Your Payment History - 35%
  • The Amounts Owed - 30%
  • The Age of your Credit - 15%
  • How Much New Credit - 10%
  • The Types of Credit - 10%
The following video covers these 5 areas in more detail:

We have several web sites that cover the credit guidelines specific to the type of home loan you think you want to qualify for. even has a page on how you can repair your credit on your own.  It's easy.  The sites are listed here:

VA Credit Guidelines
FHA Credit guidelines
USDA Guaranteed Credit Guidelines
USDA Direct Credit Guidelines
Conventional Credit Guidelines
Credit Repair You Can Do Yourself

Feel free to browse these sites without fear.  We are not a lender and we sell nothing.  This is good information that you should know.  Knowledge is Power.