Credit Scoring

Lenders use a statistical method called credit scoring to assess the credit risk of loan applicants. While there are a few different credit scores, FICO (developed by Fair Isaac & Company) is the most commonly used. FICO rates the likelihood that you will pay back a loan. FICO only uses information contained on the credit profile of the individual that is maintained by the credit reporting agencies.

Your credit profile lists what types of credit you use, the length of time your accounts have been open, and whether you have paid your bills on time. It tells lenders how much credit you have used and whether you are seeking new sources of credit.

Credit scores primarily reflect your payment history according to those who have extended credit to you in the past and how you have handled other financial obligations. Credit scores do not take into account down payment amount, income, savings, or any demographic information, including marital status.

The credit score is designed to factor in positive as well as negative information regarding past payment history. The score is not static. While late payments bring the score down, reestablishing an on-time payment record will bring the score back up. Credit scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act.

The most important action that a person planning to apply for a mortgage loan can do is to pay bills on time. This is true regardless of how small the amount the bill is. It is also advisable to keep credit card and other revolving card balances low relative to the spending limit. There is space for up to four “reason” codes on the FICO report. Lenders can use these codes to explain loan denials or higher-than-expected rates, if these appear on the report.