What is a consumer credit score and how is it determined?

Before a bank will lend you money to buy or refinance a home they want to assess your risk level and know two important pieces of information about you: If you can pay the loan back and if you actually will pay it back.

To see if you can pay the mortgage back they will look at your debt to income ratio (DTI).

To gauge your desire to actually pay the loan back they will look at your consumer credit scores, one of the most popular credit scores is the Fair Isaac & Company FICO score.

You credit or FICO score can range from 350 (very poor and high lending risk) all the way up to 850 (considered perfect and low lending risk)

Your consumer credit scores are based only on the information that is reporting on your credit report. What they do not take into consideration is the amount of money you make, how much you are putting down on the home, equity in your home, gender, marital status and other personal information.

Basically they do not profile based off of demographics, this is why they were invented to give a non biased opinion based on facts and relative financial activity. What they do consider is things like past account payment history, current amount of debt, current percentage of available debt used, length of time you have had accounts open, types of accounts you have open, and number of recent credit score inquiries.

They look at both the positive and negative aspects of these factors. A late payment on an account will reduce your FICO score but you can increase again by consistently paying on time again.

How your credit score is determined

As a general rule of thumb your credit scores are generated by placing different levels of importance on your credit behavior.

Roughly 35% of your credit score will be based upon your overall account payment history both past and present.

Roughly 30% will be based around your current level of debt and how much of your available credit that you have used.

Around 15% is based on the amount of time the accounts on your credit report have been open and reporting, plus the types of account you have on your report. A maxed out credit card is not good when compared to a mortgage with a good payment history

And the final 5% will be based on your desire to acquire new credit accounts, these are referred to as recent credit inquires.

To actually have a credit score reporting you must have an open account on your credit report that has been open for at least six months. This will give the credit bureaus score generating system the minimum amount of information that it needs to generate a score.

If you do not meet the minimum requirements for a credit score to be generated you may just have to wait it out or establish some accounts.

If you have any questions on your credit scores or your ability to get financed for a mortgage please feel free to contact one of our friendly mortgage professionals at (414) 771-1200