How is My Credit Score Calculated?

September 13, 2012

Ever wonder how your credit score is calculated? There are several factors involved in determining your credit score. Learn more now.Banks use your credit score (aka FICO score) to help determine whether you are a worthy risk for a Hendersonville home loan. It’s also one of the deciding factors regarding your interest rate on a mortgage loan. Most likely, you already know WHAT a credit score is. But have you ever asked yourself, “how is my credit score calculated?” That’s a much more complicated answer.

Lenders like it when you have several different types of credit. That includes not only revolving credit, like credit cards and department store accounts, but also previous mortgage notes on other Hendersonville area homes, installment loans, student loans, car loans, etc.

Most Hendersonville home owners have debt. It can sometimes be unavoidable. But, too much debt makes you look risky. Make a concerted effort to pay down as much debt as you can before you apply for a mortgage loan.

Banks live by the mantra “those who cannot remember the past are condemned to repeat it.” Your payment history says a lot about your creditworthiness. Late payments on any bill, including the cable, cell phone, electric bill, etc., may be reported to the credit reporting agencies, reducing your score and your chances of scoring a home loan.

Not only is your payment history important, but the length of time you have had credit can affect your score as well. The longer you’ve had a history of credit accounts and payments, the more complete a picture a mortgage company will have at your spending and repayment habits. A long history of credit with faithful payments makes your Hendersonville home loan a much more attractive risk than someone who just received a credit card two months ago and is applying for a home loan.

Finally, opening new credit while trying to purchase a Hendersonville home is a definite “no-no”. First of all, your credit is hit by 5-10 points every time someone makes an inquiry. When you purchase a car, for example, the dealership may try to find you the best deal by shopping around at a few lending institutions. That could mean three to four different hits on your credit at one time. Secondly, a mortgage company could look at this as someone who is set on a spending spree, which makes you look less fiscally responsible and can cost you approval on your home loan.

Knowing how your credit score is calculated can help you stay on top of your credit in a more effective manner. Keep these tips in mind before you apply for a mortgage on your Hendersonville home. A good score not only means loan approval, but can also determine how much it will cost you for any loan you take out.

Rich Cooke, your Western North Carolina real estate specialist

Originally posted on my Western North Carolina Real Estate blog here: http://rich-cooke.com/2012/09/13/calculating-credit-score/.

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