Your Credit Score: It's More Important Than Ever

by Nancy Osborne, COO of ERATE

It's impossible to avoid news about the unraveling of the financial markets due to the impact of bad mortgage loans being made in the sub-prime area over the past few years. Lenders are now tightening their guidelines at a rapid rate as investors of these risky mortgage loans have all but disappeared and many of these lenders are shutting their doors. A liquidity crisis has developed as investors are no longer willing to take on perceived risk. The days of easy money are gone and now only those who can verify their income, assets and good credit are going to get a loan. If you have poor credit with a FICO score of less than 620, you are going to find it tough going out there. Now it is more important than ever to take stock of your credit situation and how you may improve your standing in the eyes of a lender. The worst time to actually go through this exercise is when you need credit quickly. The best strategy is to stay on top of it now so that when you want credit, it will be available to you at the best terms possible.

Anyone who tells you they know exactly how a FICO score is calculated is misleading you. The score is based on a propriety (or secret) model which is constantly changing due to research in consumer behavior and changes in consumer economics. The essential purpose of the FICO score is its ability to predict which borrowers are likely to default on their payments. After studying the credit files of masses of consumers, the FICO scoring model was born. There is general information available on calculating credit scores, and much of it should be obvious, such as paying your bills on time. Because of the ripple effect one late payment can have on the collective interest rates on all of your debts, it is vital that you make no mistakes, leave no room for error and always, always pay on time. The tragedy is to be late for reasons other than economic and simply due to forgetfulness or oversight as this will be a costly mistake that you may not easily overcome.

Although there are about 150 factors which can impact your risk profile, there are thought to be 5 predominant factors having the greatest impact on the scoring model. It is important to note that your recent credit history will likely always carry more weight than your past as the system is looking at current trends in predicting future behavior. These 5 predominant factors are as follows:


Payment History - do you pay on time and how often (if ever) are you late?

Outstanding Debt Balances - what is the total amount of debt you owe and what types of accounts are you carrying balances on? For example revolving (i.e. credit cards), installment (i.e. auto or student loans) or mortgage related.

Past Credit History - includes the complete payment history on an account since you initially opened it.

Recent Credit History - how many accounts have you applied for or opened recently as well as what type of credit you have been searching for or inquiring about.

Type of Credit Used - are you using more revolving or installment credit? How many mortgages do you have?


Consumers are able to request one free credit report per year from each of the three major credit reporting agencies. To obtain copies of your credit report from all three credit agencies, and to continue checking your credit report periodically, contact:

Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
800-685-1111
www.equifax.com

Experian
P.O. Box 2104
Allen, TX 75013
888-397-3742
www.experian.com

Trans Union
P.O. Box 2000
Chester, PA 19022
800-916-8800
www.tuc.com

  Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.