We've seen how potential buyers seeking a loan need a down payment, steady job, and clear record of meeting financial obligations in the past. All of those are vital in a loan application. Yet they are no longer the critical elements that make or break a case. In recent years, lenders have become increasingly dependent on a three-digit number.
It's called your credit score, and it's role is to predict the likelihood you will pay back what you borrowed on a timely basis. The higher the number, the lower the chance you will default on your loan.
Your score is derived solely from information contained in your credit report and does not include age, race or where you live.
Instead, only proven predictors of credit performance are included.
Credit cruncher Fair Isaac & Company (FICO) is the industry leader and offers a complete education on the topic at www.myfico.com. It's a great place for potential borrowers to begin their credit homework assignment.
FICO keeps many secrets about how scores are calculated, but tells us the following:
- Your payment history has the largest influence on your score, accounting for 35 percent of the total. Have you paid your monthly payments as agreed or have you been late a time or two? Prompt payment matters.
- How much you owe makes up 30 percent of your score, indicating that you are or are not overusing the credit you have. It is best to keep balances low in the year prior to your loan application.
- Length of your credit history reports how long you have successfully used credit in the past and how recently you have used it. This time factor makes up 15 percent of your score.
- Finally, your use of new credit and the types of credit you have sought in the past account for 10 percent of your score. It's a good idea to minimize new credit requests prior to making your application for a home loan. Also, avoid overuse of credit which might be indicated by frequent payday loans and small installment loans. If a lender believes you are dependent on your credit, they will be less likely to grant you more.
The important message from lenders is that you should always pay your bills on time and not abuse your credit by living beyond your means.
Another fact you need to know is this: your credit score is influenced more by recent activity than by problems in your past. Most derogatory information is reported for seven years, but fades in importance long before then. That means you can improve your credit score in the next few months by simply paying your bills on time. For a broader discussion, visit money99.com.
John Adams is an author, broadcaster and investor. He answers real estate questions on radio station WGKA (920am) every Saturday at noon.
For more real estate information or to make a comment, visit www.money99.com.
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