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What is Credit Scoring?

What is Credit Scoring? - Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a credit score -- helps predict how creditworthy borrowers are, that is, how likely it is that they will repay a loan and make the payments when due. Because a credit report is an important part of many credit scoring systems, it is very important to make sure its accurate before you submit a credit application.

There are 3 major credit reporting agencies. Experian , Transunion, and Equifax. Many lenders take all 3 scores into consideration when calculating credit worthiness.

The most current model is called the 'FICO' scoring system, developed by Fair Issac. The model uses 4 categories to make up a score.

-35% of the score is determined on how timely we pay our bills.
Payment tardiness is determined in 30 day incriments. 30, 60 ,
90 days and so forth. Being on time or 'current' is premium.

-35% of the score is determined on what percentage of credit granted
is actually being used. If our credit limits are being used to
full capacity or commonly called 'maxed out' - our score will
suffer.

-10% of the score is calculated on how many times we ask to have our
credit pulled. Too many pulls tells creditors we may be trying
to hard or 'desperate' to find credit.

-20% of the score is determined by the length of credit history.
Well established credit over years and years of time is
premium and many lenders choose to consider borrowers
with at least a 2 year credit history.

There are different types of 100% loans. You can either get 1 loan for 100% or an "80/20" loan. Speak to your mortgage professional to see which program is best for you!