The Statistics of Credit Scoring

When a mortgage company reviews your loan application, they first and foremost want to assess your credit and make sure that you are reliable with money. If you have a lot of past debt, they may be hesitant to extend a loan to you. They must come up with an objective credit score so there is a firm and concrete evaluation of a person’s credit that does not vary according to the person who assesses it.

Rather, the method they use is a statistical calculation whereby a number rating is assigned according to the probability or likelihood that you will pay back the loan. The score will range from 350, which is high risk, to 950, which is low risk. There are a few different types of scores such as FICO scores, created by Fair Isaac & Company, Inc. for all of the credit agencies.

First you should know that your credit score only takes into consideration the information provided on your credit report. It does not take into consideration your income, your savings, the amount of your down payment or any personal information such as race, gender or marital status.

Credit scores usually tell a lender if you have had any debt in the past, how much credit you have had, what your outstanding balances are, your current level of debt, length of your credit history and number of creditors and/or credit inquiries. Some parts of your credit profile are more important than others, meaning that some factors will play more of a role in the lender’s decision to approve or disprove your loan request.

Thirty-five percent of the weight or priority is put on your previous credit performance in relation to your payment history. Thirty percent is put on your current level of debt and current balanced in contrast to the amount of credit granted. Fifteen percent of emphasis is placed on the time your credit has been in use, or the time you have had a credit card open. Fifteen percent also is put on the types of credit you have used, such as debit or credit accounts versus loans. And finally, five percent of the credit evaluation is the number of inquiries you have made, meaning how many times you have signed up or applied for credit or loans, whether or not you were approved.

More than anything else, lenders care the most about whether or not you pay your bills on time. If you have always paid your bills on time in the past, the mortgage company will probably feel safe giving you a loan, because they know you can be trusted to make timely payments. Second, lenders look at how much revolving credit you have inclusive of how often you open cards or how long they remain active.

You should not open a lot of credit unless it is necessary. Sometimes you will forget you have an account open and it will affect your credit profile later. Also, make sure that you have at least one account that has been open six months or longer. Otherwise the lender may need more credit/financial information to make a decision.

Your credit score will always be accompanies by a reason code. There are four main reason codes that pinpoint why you received the score you did, or why you were approved or rejected for your loan. The code gives the most significant or influential factors of your report, not all of the little or more minor considerations. Remember that these scores and codes are given by the mortgage company, not by the credit agency.