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When you apply for a new loan, your lender is required to conduct a risk assessment on you to determine how likely you are of repaying the loan. Lenders typically obtain your "FICO" credit score form one of three reporting sources to aid them in this process.
Your "FICO" credit score is arrived at by applying a sophisticated mathematical formula to your credit behavior, as compared to the behavior of other borrowers like you. The final score provides the lender is simply a mathematical gauge of risk you represent to a them if they loan you money.
Your credit history, income, outstanding debt and debt utilization over the years, access to credit, and other indicators of your financial behavior indicate how likely you are to continue to pay your bills on time. A numerical score from their formula typically ranges from 300 to 850. The higher your score, the better lenders like you. A credit score of 620 is frequently the "cutoff point" for loans which can be funded by Fannie Mae or Freddie Mac. If your score is below the magical number of 620, your lender will need to shift you to the private, or "sub-prime" money market, where interest rates are higher. You pay less as your FICO® score improves.
BREAKING DOWN YOUR FICO CREDIT SCORE:
35% of your score is determined by the payment history on your credit accounts, with recent history weighted a bit more heavily than the past; 30% is based upon the amount of debt you have outstanding with all creditors; 15% is produced on the basis of how long you've been a credit user (a longer history is better if you've always made timely payments); 10% is comprised of very recent history, based on your efforts to obtain loans or credit lines in the past few months; 10% is calculated from the mix of credit you hold, including installment loans (like car loans), leases, mortgages, credit cards, how often you've moved and other public and private information about you.
LENDER PRACTICES TO WATCH OUT FOR:
Lenders frequently want you to fill out an application when you call for an interest rate quote. The first reason is that if you have "sub prime" credit, they don't want to quote you a rate that will not be available to you. The second reason is that once you've applied (and perhaps paid a fee) you're less likely to use another lender. So, when shopping for rates, just be sure not to give the lender any money until you are sure you have finished shopping. |
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