Understanding Credit Ratings

Credit scoring uses data from any leading credit repository - Equifax, Trans Union, or Experian to measure the borrower's default risk. Scoring involves measuring hundreds of variables. A credit score, known as the FICO score, is generated using a computer program designed to analyze credit data and measure a borrower's default risk.

According to Fair, Isaac and Co. Inc. the FICO score reviews the following items in computing a score:

• Payment patterns on various accounts, such as credit cards, retail accounts, installment loans, mortgage loans.

• Number of existing credit cards.

• Open or active accounts, their type, the length of time credit has been available, and credit levels.

• Current indebtedness level and its relation to available credit.

• Credit performance, including the number and severity of late payments.

• Number of recent inquires or attempts to get new credit.

Tips for Cleaner Credit

Do the following before your start looking at homes.

Don't let stores run credit checks for new accounts. (Lenders who see several recent credit checks are often concerned that borrowers may take on additional debt soon after the mortgage is signed.)

Don't open new credit cards or increase credit limits.

Do pay all credit card bills on time.

Do review your credit report for errors.

Do not close unused credit card accounts, especially the oldest cards.  The history helps to illustrate a lengthy credit history.  Your lender can determine if any credit accounts need to be closed to improve your credit score.

Don't co-sign any loans.

Adapted from "Help Borrowers Understand Credit Scoring," Jerry DeMuth, REALTOR® Magazine

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