What is a credit score & how can I improve mine?

Q: What is a credit score?
A: Lenders want to know two things about you:
Your ability to pay back a loan, determined by your income-to-debt obligation ratio
Your willingness to pay back the loan, determined by your credit score

Q: Who determines your credit score, and how?
A: The most widely used credit scores are FICO scores that range from 350 (high risk) to 850 (low risk).
Credit scoring was developed as a way to consider only what was relevant to somebody’s willingness to repay a loan. The two main components of your credit score are your payment history and the amounts you owe. Your credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score.

Different portions of your credit history are given different weights.

 

* Ten year old accounts – good. Six month old account – not as good.
** i.e. installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards
If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.

Q: What’s considered when determining a credit score?
A: Information contained in your credit profile, including:

  • Past delinquencies
  • Derogatory payment behavior/late payments
  • Current debt level
  • Types of credit
  • Length of credit history
  • Number of credit inquiries
  • As well as bankruptcy filings, foreclosures and “maxed out” lines of credit

Q: What NOT included in your credit score?
A: Factors such as:

  • Income
  • Savings
  • Credit card solicitations

Demographic information, such as:

  • Gender
  • Race
  • Nationality
  • Marital status

Q: How do I improve my credit score?
A: It’s virtually impossible to change your score in the time between when most people decide to buy a home or refinance their mortgage and when they apply. So the short answer is that you really can’t improve it “on the spot.” But there are ways to make sure that your score is as high as possible when you apply for a loan.

Order a copy of your credit report about once a year, and dispute any inaccuracies. Make sure that the information each of the three credit reporting bureaus has on you is consistent and up to date.

If multiple credit reports are requested on your behalf during a limited amount of time, your score goes down until time passes without any inquiries. But, a series of requests in relation to getting a mortgage or car loan is not treated the same as other requests. Also, the law has been changed so “consumer-originating” credit report requests don’t impact your score as much.