If you apply for credit, no matter what type, a lender or loan broker will want to know what is the risk of lending you money, or the chances that they will be repaid. Most lenders use the FICO score to determine your creditworthiness. Scores, made up of those accounts that are reported to the credit bureaus, are determined by the information in your credit file.
How the FICO Score is Used
Your three FICO scores affect how much money you can for a loan and under what terms (the amount of interest you will be charged, etc.). The higher your score, the better an interest rate you will get. The score predicts how likely you are to make your payments on time.
Scoring for Mortgage Lending
The credit score is always a three-digit number ranging from 300-850. A home loan, called mortgage lending, is not a highly risky form of lending as would be a personal loan. The home itself is always collateral if anything goes wrong. Most credit scores fall between 600 and 700 points; 620 is considered the "going score" for a sub-prime loan. A sub-prime loan won't get you the best interest rate, but it will get you a loan. There was a time when the score was not included in the consumer credit report and had to be purchased separately, but that is no longer the case. Most reports nowadays come with the score. If it doesn't, you can request it from the person who pulled your report; and you do have to pay extra for it.
How Is the Score Determined?
A credit score is calculated using mathematical models formulated to analyse your debt-to-income ratio and your repayment habits. Your payment history is compared with thousands of other consumers and then averaged. The factors that help determine the score are how you made previous payments, what your outstanding balances are, how long you have held the credit, the number of inquiries in your file, the type of credit you tend to use most and how much credit is available to you based on your debt and income.
How to Prepare for a Credit Check
Prepare for a credit check by pulling your own report and reviewing it before anyone else does. You can also use it to help fight identity theft or dispute errors. Keep in mind that lenders and other creditors may also use your credit report to determine your eligibility for a job, whether or not you qualify for apartment, home, or car leasing, or simply to verify who you are and where you live and work.
Credit scores cannot determine whether you are a good credit risk or a bad one. Bad things do happen to good people who once had good credit. About 58 per cent of the population has a credit score in the 700 to 850 range, with the lowest percentage of that (13%) at 800 or above. Credit stipulations are adjusted to accommodate the other 42 per cent of the population, and the biggest factors involved are being subjected to higher interest rates, credit approval with certain limitations, and very limited credit approval to those with scores in the high 500s to low 600s. Typically, people with scores from 300 to 550 will not be approved at all, but it's not impossible--particularly if you have a great deal of liquid or fluid cash on hand, or some other type of collateral for a trade.
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