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Credit Scoring Fundamentals

Homeownership Program

What is a Credit Score?

A credit score is a number that the lenders use to help them decide how likely it will be for them to be repaid on time if they give a person a loan or a credit card. The credit score is built on credit history. The FICO 8 score ranges from 300 to 850. A decent credit score is integral for your financial well-being, the higher it is, the less likely you are to default on payment.

It is important to note that each credit bureau has its credit score model as well as different models used for mortgage lending and auto lending. This means that not all credit scores are FICO Scores. However, FICO score is widely used by lenders to make lending decisions.

How is Credit Score Determined?

One downside of the credit scores is that when you have a financial hardship and you are unable to make your payment on time; your credit score will not consider this. It will only analyze the information in your credit report. There a so many factors that make up your credit score.

One of the most significant impacts on your score is your payment history. If you always pay your bills on time, this will reflect well on your credit report, thus raising your credit score. Payments that are received more than 30 days late will hurt your credit score. The accounts that have been sent to an outside collection agency will also reflect poorly on your credit report.

Next is the amount of debt that you owe. The debt that contributes the most to your credit score is your credit card debt. The rule of the thumb is to make sure that you never owe more than 30% of the available credit limit on a credit card.

For instance, if the limit on your card is $1000, the most you want to have spent on that card is $300. If you are charged more than that, and it reflects on your credit report, that could negatively impact your credit score.

While other types of debt still count in that 30 percent ratio, what counts most is your credit card debt as they are unsecured debts.

About 15% of your credit score is determined by the length of time you have been using credit. This will take into consideration how long you have been using a specific type of credit. As long as you have a good payment history, the score can take into account all of your loans dating as back as when you opened your first credit account.

If you have a negative payment on your credit report, they can only be reported for seven years, but for the positive information, this can be reported on your credit forever.

Also, note that a small percentage of your score will be determined by a new credit you may have established. This will consider the number of inquiries you have completed in the last 24 months as well as the number of credit accounts you have opened and the type of account (credit cards, mortgage, auto loan, etc.). Additionally, the portion of accounts on your credit report opened in the last 24 months compared to the accounts that have been open longer is also taken into account.

Lastly, the credit scores will look into the type of credit you are using. Ideally, you should have a mix of secured and unsecured debt. However, this doesn’t mean that you should have every type of debt, but to have a good credit score, you should have a mix of debts.

Take a look at the following summary;

Checking your Credit Score

It is a common misconception that checking your credit score affects your credit score. Your credit score is determined by the formulas that are used in the assessment of your creditworthiness. The lenders will evaluate the risks of extending credit to you in part by using the credit scores, which measures your credit risks.

The credit scores will continuously adjust as the information in your credit report changes. Therefore, it is crucial to continually check your scores as it will help you keep track of the changes and setbacks.

Also, it is important to understand that there is no “quick fix” to bad credit, especially if it is based on accurate information. Borrowers will at times find inaccurate information on their credit scores, in such a situation, it is important to file a dispute with your agency, which you will not be able to do unless you have a copy of your credit report.

Why Are Credit Scores Important?

Credit scores help millions of people gain access to the credit that they need to do things like getting an education, buy their first home or cover medical expenses. Also, you will find that come insurance and utility companies will check your score when setting up the terms of the services.

A good credit score will save you thousands of dollars in interest and fees as lenders are more likely to extend lower rates if you present less of a risk than them.

To get more insights about your credit score, or know the options available to you if you are looking to buy your first home, connect with me or one of our VIP agents who are well spread across the nation. To check whether we have agents in your county, click the following link  You can also contact me directly for a referral if we do not have an agent in your area.  Stay up to date with current real estate news and housing developments, by visiting our blogs page at daily.   If you’d like to set an appointment and speak to me directly, use the following link,

Disclaimer: The views and opinions of Eric Lawrence Frazier are his own and do not necessarily represent views of First Bank or any organization affiliated with Eric Lawrence Frazier, or the Power Is Now Media Inc.  First Bank is an Equal Credit Opportunity Lender. Eric Lawrence Frazier MBA is also a Vice President and Mortgage Advisor with First Bank.  NMLS#461807 and a California Licensed Real Estate Broker DRE# 01143482. Email:  Ph: 714- 475-8629.

Eric Lawrence Frazier MBA
President and CEO
The Power Is Now Media Inc.


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