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Credit Score Factors for Mortgages

Credit Score Factors

A credit score can be defined as a number that evaluates the possibility of a person to pay back a loan within a given period of time. When an individual is interested in borrowing money, the lender informs the credit bureau. The bureau comes up with a credit report which is aimed at analyzing the borrower’s management of their debts.

There are two well-known credit score bureaus accredited with the mandate to provide credit scores namely;

Fair Isaac Corporation’s FICO Credit Rating Scale

Vantage Credit Rating Scale

Credit score ratings are reliant on a number of factors:

The borrower’s history of credit payment.

Existing debts the borrower may have.

The borrower’s credit history time length.

The borrower’s type of credit mix.

How often the borrower applied for new credit.

In any case, a lender always checks the borrower’s credit score in order to know what possible risks they face in the event that they offer the money. Borrowers with a high credit risk have a high-risk premium included in the price of money being borrowed. By way of illustration, an individual with a substandard credit score will get money with a higher risk premium as opposed to one with a more desirable credit score.

Below are the two main credit score scales in the U.S.A.:

FICO Credit Score Scale: With an approximated 90% coverage, Fair Isaac’s Corporation is the owner of the largest market share in the credit score industry. The corporation has set up an office in more than twelve states and has its headquarters in San Jose, California. This is the FICO credit score and their interest rates implications:

800 – 850 Exceedingly Good

 

750 – 799 Exceptional

 

700 – 749 Really Good

 

650 – 699 Good/Average

 

600 – 649 Fair

 

550 – 599 Poor

 

500 – 549 Very Poor

 

300 – 499 Exceedingly Poor

VantageScore Scale: Vantage Score is a partnership among three main credit bureaus namely; Equifax, Experian, and the TransUnion. Despite FICO possessing the lion’s share of the market, creditors also refer to the Vantage Score scale for another look into a borrower’s credit history. This is attributed to the difference in scales from the FICO scale.

Below is an illustration of what the Vantage Score scale looks like:

900 – 990 – A – The lender will offer their best interest rate.

 

800 – 899 – B – Possible to get a loan at a good interest rate.

 

700 – 799 – C – You may qualify for the loan but not at good interest rates.

 

600 – 699 – D – You may qualify but the interest rates will be very high.

 

500 – 599 – F – You may not be eligible for a loan.

With the Vantage Score scale, grades are assigned to different credit scores. The scale has however been associated with vagueness and lack of clarity on individual’s creditworthiness. For example: Assume there are two debtors John and Christine. Let’s say John has a great credit record and deserves to be in grade A. On the other hand, Christine manages to get into grade A. These two people may seem to have equal creditworthiness to creditors even though their credit histories may differ.

To improve on credit score, a borrower should consider:

Paying back loans fully within the given time.

 

Steering clear of unsolicited credit cards and also overreaching credit as it results in a poor credit score.

 

Limiting the number of credit applications because most hits on the credit report are viewed negatively.

 

Don’t back out on paying bills. If unable to pay back debts, the creditor should be informed to change the repayment deal.

 

Always be sure of the credit type because some financing companies’ credit may have a negative effect on credit score.

 

It is of significance to understand what a credit scale is in order to avoid decisions that could cause trouble to personal finances. It’s also good to keep debts as low as possible and avoid extending credit near limits.

These tips could prove useful in improving credit score and also guarantee best rates on loans.

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