THE ROSE DENNIS TEAM
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What Is Your Score???
No, not your football or basketball score, but your credit score. This is a vital number that will affect the interest rate you pay on a loan, especially real estate loans for which it was developed, the cost of homeowner insurance premium, whether you might get a rental, or maybe even if you get the job you want. Your credit score is so important that you should check your own score periodically. I will tell you how in a minute.
What is credit scoring?
Credit scoring is the process of applying a sophisticated mathematical model to your credit behavior and coming up with a number that describes how you handle credit. This mathematical model uses your outstanding debt, your usage of debt over time, your credit history, your income, and how much unused credit you have to determine the probability that you will pay your debts or bills on time. This allows lenders to determine the risk they take when they make you a loan.
The oldest and most well known mathematical model was developed by Fair, Isaac and Company and the scores this model generates is called your “FICO Score”. FICO Scores range usually from 300’s to say 850 with the higher scores indicating a better likelihood that you will pay your bills.
How is your “Score” used?
Lenders often speak of “A” credit and, alternately, “Sub-prime” credit. There are grades of sub-prime lending with the lower the FICO Scores generating B, C, or D credit and higher interest rates. If you are willing to pay the price you can almost always get a loan.
Sub-prime lending uses other methods to hedge against the risk of lending to a customer with lower credit scores. Lenders may only grant loans at 75% loan to value (LTV) for low FICO scores but provide 100% financing to borrowers with high scores.
Can scoring benefit you?
The huge increase in lending to marginal clients is due in large part to credit scoring. Banks actually vie for business from more borrowers because they can now more accurately assess the risk of lending and be compensated for that risk by higher interest rates. Now more buyers are able to move into their dream home and more sellers can move up in homes.
Investors in pools, or groups, of loans are more likely to “buy” and hold loans from banks since they can determine the risk involved. In large measure FICO type scoring has lead to a surge in mortgage lending.
The prime beneficiaries of “scoring” has, so far, been the sub-prime borrowers who can now get loans whereas they could not before. Hopefully some day banks will reward customers who have wisely and efficiently managed their credit and give even better interest rates to those customers who have high FICO scores.
Now, if you know your FICO score, you know exactly how the bank is judging you and whether you are likely to get the loan even before you apply.
It’s no longer a secret!
At first there was great secrecy surrounding “scoring”. This was not consumer friendly but the credit scoring groups felt if everyone understood how scores were calculated they would change their behavior and make the formulas invalid. You should know your credit score and if it is good use this information to bargain for the best rates. You may get your own FICO score from your credit bureau, from a bank when they pull your credit, or from Fair, Isaac & Company at their web site, www.MyFICO.com.
Do multiple inquiries lower my credit score?
Not necessarily! If you are shopping for favorable loan terms you could have multiple inquiries about your credit in a short period of time. Fair Isaac considers multiple requests for credit history that occurs with in a 7-day period as a single inquiry. Some lenders do not want you to shop around so they have fostered this myth about multiple inquiries. And in any case an inquiry from a borrower about his own credit is not counted.
Improve your score.
1. Pay bills on time.You cannot improve your score overnight and often a year without late payments is necessary. Be especially careful around the time you are applying for credit. Late payments several years old hurt scores less than recent delinquencies.
3. Reduce credit card balances. Keep the ratio of money owed on credit cards in comparison to the credit limit low. Do not max out credit cards.
4. Do not close unused credit cards near the time of applying for a loan.This will only increase the amount of debt used to debt available. The average age of your accounts is important and if you close an old account you reduce that average age.
5. Pay off debt rather than moving it from card to card. Remember it is the ratio of used credit to available credit that is important. Just because you get several credit offers in a week does not mean you should open an account.
Weighing your score.
Fair, Isaac has suggested that 35% of your credit score is due to payment history while only 10% of your score is due to the amount of new credit you have and the type of credit you use. 30% of your credit score is made up of the ratio of credit used to credit available. The length of your credit history accounts for 15% of your score.
Summary.
Your credit score effects you more and more each year. It is vital you know your score and take steps to improve it well in advance of needing credit. Use the knowledge of your score to bargain for better interest rates. Knowing “Your Score” can be as helpful as knowing your blood pressure.
