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How is my credit scored and why is it important?

How is my credit scored and why is it important?

Your credit is tied to a parameter named FICO (Fair Isaac Corporation) score. Mortgage or home equity loans are related to your credit. Home equity loan, usually has shorter term than mortgage term, and equity loan amount is based on your how much equity or appreciation you have in your home.

For prospective buyers, if you're in the market for a mortgage, you need to know that your FICO credit score computed statistically. Your FICO score is created from information collected by the three major consumer credit agencies Equifax, Experian and TransUnion. These agencies may not give you an identical score since each one has a different way to evaluate your scores. You can get free copies of your credit reports once a year at annualcreditreport.com. You could either get FICO score by paying $15.95 at MyFico.com or some lenders will provide your FICO score when you apply for a loan.

The five are 5 variables, weighted as percentage, that contribute to your FICO score:
1. Payment history - 35%
2. Amounts owed - 30%
3. Credit Length - 15%
4. New credit applied - 10%
5. Types of credit used - 10%

FICO scores range from 300 to 850 with the median score of 723. In general, lenders would give you best interest rate if you have high score of at least low to mid 700s. The average credit score is 692. If yours is below a borderline score of 680, you should need to boost your FICO.

What to do if you find mistakes in your credit report?

If you find any mistakes in your credit reports, you need to request to have the information corrected by writing to the reporting agency as well as the creditor who filed the negative information. The quicker way is to pay off unpaid bills as much as you could afford from some of your credit cards. Then you ask for a rescore. You can do all for yourself if you've got time and patience. There are many firms so called "rapid rescorers" that could help you. They are specializing in fixing mistakes in credit reports directly with the big agencies at a cost of $25 to $50 for each line item they get fixed for you. They are hired through mortgage brokers or lenders and they can get the job done within as much shorter time as 3 days instead of months if you do it yourself.

How do FICO score effect mortgage or loan rates?

Of course each mortgage lenders offer different rates. But In general, all things being equal, your Mortgage rate is related to your FICO score. That is if your score is good (say 700s), you will have lower rate than someone worth FICO I the low 600s. The rate different is quite substantial (could be between 1% to 2%). Overall, there are 3 classes of mortgage: A-paper (A class), Alt-A (B class), and Subprime (C and D classes). Subprime mortgage rates are usually for scores below 620. The term "good credit" is relative. Some lenders define good credit borrower is someone with a FICO score of 680 or above.

Help! How can I improve my credit score?

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