What You Need To Know About Credit Scores

One of the first things on our customers' minds when they reach out to us is their credit score. And for good reason. A higher score can improve your chance of getting a mortgage loan, and might help you get a better interest rate on a loan. A lower score can have the opposite effect. So yeah, credit scores are a pretty big deal. Here’s some insight into how scoring works and how your activities can affect it.

The Basics

  • There are three independent monitoring agencies that collect consumer credit information—Equifax, Experian and TransUnion.
  • Using data from these monitoring agencies, companies like Fair Isaac Corporation, best known for its FICO score, build scoring models that determine a person’s credit risk and likeliness to repay debt.
  • Each model or “scoring” approach is different. Because of this, your credit score may show up slightly different depending on the resource you use. The score itself is simply a number that falls somewhere between 850 (excellent) and 300 (opposite of excellent).
  • Mortgage companies use specific versions of the scoring models from each of the three credit bureaus.

The Biggies

MyFico, Credit Karma and similar orgs offer credit suggestions and support. The info on these sites can vary, so we’ve put together a list of big-ticket items to help keep your credit in check:

  • Credit card usage Since credit card history is one of the surest ways to measure how debt has been repaid to date, it's a big part of the weighting process. Having a credit card and using it smartly can improve your score. On the flip side, improper use of a credit card can have a negative impact. Not having a credit card isn’t helpful either; in fact, simply opening a line of credit can significantly improve a credit score.
  • Mortgage payment history If you’ve ever had a mortgage, your last 12 months of payment history are important. Any payment reported later than 30 days can hurt your score, and most lenders are not able to do a new mortgage unless your last 12 months are on time.
  • Judgments, liens & collections One of the easiest and fastest ways to improve credit is to establish payment plans and ensure outstanding obligations are removed once they’ve been settled.
  • Bankruptcy Not great, but it’s also not the end of the world. We can usually help consumers get a new mortgage after two years of a bankruptcy filing.
  • Foreclosure This falls in the ‘not great’ category as well. However, it’s not uncommon to be eligible for a new mortgage three years after a foreclosure.

The Takeaway

It’s important—and easy—to monitor your credit. You can request a free report once a year, and use it to catch potential discrepancies. You can also subscribe to a credit monitoring company, which can provide greater detail about your credit history and alert you when changes to your credit score occur.

Monitoring services are a great way to develop healthy credit habits, which are not only good for obtaining a mortgage, but also for things like car loans, credit cards and more.

This way, when you do apply for a mortgage, you’ll know your credit is as healthy as it can be.

Good reads:

Insider’s Guide to Credit

How to Get Your Credit Mortgage Ready

MLOA has no affiliation with the companies or websites of MyFico, Credit Karma, Annual Credit Report, or Next Advisor; these links have been supplied for informational purposes only.