Learning Center > What your score means
LA credit score essentially is a numerical "score" based on one's ability to pay credit/debt over time. It is used by lenders to assist them in determining which loan program and interest rate can be made available to you.
The mortgage industry started utilizing "scoring models" in the early 1990's. The use of scoring models in the mortgage industry came about as the major secondary market players known as Fannie Mae and Freddie Mac developed new automated underwriting systems. Those systems compare payment histories from literally millions of similar loans coupled with the credit score of the applicant. The mortgage industry has been slow to adapt, but finally scoring models now figure prominently in the future of how people obtain home mortgages.
There are three major credit bureaus compiling background information: Equifax, Experian and TransUnion. When a consumer obtains credit, the creditor reports the payment history to these bureaus monthly.
These bureaus simply accept the information as it comes in electronically. This is very important to remember, they DO NOT check the accuracy of the information.
When you apply for a mortgage, Mortgage One NW, LLC will request a tri-merge (all 3 bureaus) credit report from a credit reporting company. This company pulls together a credit report electronically.
Along with the information, the credit reporting company receives a numerical score. The score represents a composite of your credit history, employment, ability to save, and so on. The most well known of these scores is known as the FICO score, which was a model developed by the Fair-Isaacs Company. Scores can change literally daily, depending on the information received by each bureau.
The Fair-Isaacs Company and the other major credit repositories do not divulge how the scoring model works. Congress is pressuring the credit bureaus to be more accountable for the accuracy of the information they report AND to divulge what goes into the scoring models, to help people better understand how to improve their scores.
Why is this important?
The lending industry is moving toward "risk-based" pricing. This means that the higher one's credit scores, the less paper they will have to provide to prove that they are creditworthy AND the interest rate and/or fees a borrower pays will be based on the level of their scores.
This system, while perhaps unfair to some, will be fantastic for those who maintain excellent credit. It's one way that good credit risks can be rewarded.
Important Credit Score Tips:
- Pay all your payments on time - Very important!
- If you must maintain credit card balances, try to keep them at a level that is 40% - 50% of the maximum credit limit. In other words, if the credit limit is $5,000, try to keep your running balance below $2,000.
- Realize that consolidating all your credit cards into 1 or 2 can hurt your score.
- If you get into a dispute and it isn't a huge amount, pay it and move on. Having one or more collections, even if they are small amounts, can bring your credit score down substantially.
- Don't apply for any new credit unnecessarily. Every time you sign and return a new credit card offering, or open an account at a store, an inquiry will be generated and that can also reduce your score.
As a key component in evaluating you as a credit risk, lenders use this information to see if you have missed payments, carry high balances, or are in other ways over extending yourself financially. The following categories are a general guideline to borrower creditworthiness (these are general guidelines only - other factors may be included in your credit evaluation and the approval process):
Excellent Credit
Credit scores of 720 and above- 5 trade credit lines (credit cards, auto loans, mortgages) each having been open for at least 24 months
- All accounts have been paid as agreed
- No public records of bankruptcy, foreclosure, serious past due accounts, or collections within the last 10 years
- Low current credit balance relative to maximum available credit limit
- Minimum number of credit inquiries
Very Good Credit
Credit scores between 680-719- 5 trade credit lines (credit cards, auto loans, mortgages) have each been open for at least 24 months
- All accounts have been paid as agreed
- No public records of bankruptcy, foreclosure, serious past due accounts, or collections within the last 7 years
- Low current credit balance relative to maximum available credit limit
- Minimum number of credit inquiries
Good Credit
Credit scores between 620-679- 5 trade credit lines (credit cards, auto loans, mortgages) have each been open for at least 24 months
- Most accounts have been paid as agreed, with only occasional late payments
- No public records of bankruptcy, foreclosure, serious past due accounts, or collections within the last 10 years
- May have significant current credit balance relative to maximum available credit limit
- Several recent credit inquiries
Fair Credit
Credit scores between 580-619- 3 trade credit lines (credit cards, auto loans, mortgages) have each been open for at least 24 months
- Most accounts have been paid as agreed, with only occasional late payments
- No public record of bankruptcy, foreclosure, serious past due accounts, or collections within the last few years
- May have significant credit balance relative to maximum available credit limit
- Several recent credit inquiries
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