Monday, February 14, 2011

Credit Scoring Made Simple

Many potential home buyers come to me with credit issues.  Most are unfamiliar with how credit scoring works and the Do's and Don'ts.  Credit scoring and what makes up a credit score is very detailed.  I will give you a brief overview; but stay tuned as this will be an ongoing educational lesson.

Your credit score is a computerized number that lenders use to determine your credit risks and the likelihood that you will default 90 days on a debt. Years ago scoring became relevant as a need for consistency and standardization in credit making decisions.  Credit files were categorized into different groups to analyze similarities.  It was noted that common variables were identified within the groupings and hence a system of scoring was born.  

Your credit score is determined by these 5 factor:

35% - Your Payment History
30% - Amounts You Owe
15% - Length of Your Credit History
10% - Types of Credit Used
10% - New Credit

So the lower your score, the greater risk you are to defaulting on a loan and the higher the score, the less risk you are of default.

Stayed tuned.  Next I will breakdown each of these categories and what it means.