About Credit
Before starting your search for real estate, it is important to make sure you have maintained a good credit score. A credit score is a number between 350 and 850. It is calculated based on approximately 45 different factors from an individual's credit profile. The score is intended to indicate an individual's credit worthiness. The higher your score is, the better chance you have of qualifying for the best mortgage rates available. The three major credit repositories have slightly different data on each person. As a result, the credit scores from the three repositories are usually different.
Credit scores are frequently referred to as FICO scores, because they are based on scoring models developed by the Fair, Isaac Company. Each credit repository has its own name for a credit score. Equifax calls it a Beacon Score, Experian calls it a FICO Score, and Trans Union calls it an Empirica Score.
Credit Scores are Changed by Changing the Credit Data
The score is a function of the data found in an individual's credit profile. There is no way to directly change a score.
Every consumer begins with a perfect 850 score before the credit data is sent through a credit-scoring model. The model takes different factors from an individual's credit profile and reduces the score. The factors used to reduce the score may not necessarily be derogatory information. For example, having too many open credit cards accounts is not derogatory information. However, there is the potential that a person could charge more on their credit cards than they can pay off. This potential risk lowers a credit score.
Score Factors
A credit score is accompanied by four score factors. These factors are the four most important reasons the score has been reduced from the perfect 850 score. These are the four most important issues a consumer should look at in trying to improve a credit score. For example, someone with too many credit cards should close any unused accounts. Unfortunately, there is no way to know how many accounts must be closed in order to raise a credit score.
Another way to change a credit score is to dispute incorrect credit data with a credit repository. If you want information on how to dispute your credit report, you need to contact each of the credit reporting agencies, or the creditor directly.
More information about FICO scores
The Fair, Isaac Company - in conjunction with the three major credit repositories - worked together in the late 1980's to create a scoring system that could be used to rank potential borrowers based on the likelihood that they would pay their credit obligations. In order to accomplish this they compiled a sampling of over a million credit files with a variety of different credit histories. Using these files they were able to identify certain consistencies among the consumers that were remiss in paying their debts. They isolated approximately 45 factors within a credit profile that could be used to calculate a score that would allow a quantifiable comparison between borrowers. Each of the factors was given a different weighting based on its importance as an indicator of delinquent payment behavior.
In creating the FICO score, the Fair, Isaac Company and the three credit repositories intended to offer mortgage lenders a new tool in evaluating perspective borrowers. The score a borrower receives is merely an indicator and should be used by the lender in conjunction with the entire credit profile and other outside factors.
If you want to find out your FICO score without going through the approval process, or just want more information on how FICO scores work, visit the MyFico.com web site for more information.
