One of the most important things you require to get a home mortgage is a good credit score. Unfortunately, most people don’t know what a credit score is and how vital it is to get good mortgage rates. As you read this article you will understand what a credit score is means and how it can affect you when you apply for a home mortgage.

Know what a Credit Score is!

A credit score is a number that tells mortgage lenders about your credit worthiness or how fit you are too repay them what you owe to them. Just by looking at your credit score any mortgage lender can assess if you are someone in a position to pay back the money that you borrow or not.

Credit scores are very important tools for lenders because without a credit score there is no way of telling the potential risk of lending money to you. Your credit score also determines the level of credit and interest rates you get from a lender.

About FICO

In the United States the terms credit score is also called FICO score, as it was developed by ‘Fair Isaac & Company’, after which the score is named. This number can stand anywhere between number 300 and 850. The higher your score, the better position you are in getting good interest rates and higher level of credit.

Do you know how your credit score or FICO score is calculated?

A credit score is determined by your credit report. The data in your credit report is fed into software that uses a formula to generate the three-digit credit score number.

There are many factors in your credit report that influence the way your credit score comes out. Following is a list of such factors:

• Payment history

• Your debts or amounts owed by you

• Credit history length

• Type of credit you have taken so far

• The number of new credits that you have applied

Here is a brief look at what each of these means in your credit report

Payment History – Your payment history covers the following information:

• The number of accounts on what you have paid your dues in a timely manner.

• The number of accounts you defaulted on payments and how long you have not paid up on such dues.

• The negative public record on your finances.

Amount owed – The amount you owe covers the following information:

• The amount you have to still pay up on revolving credit and information on whether you over-extended your credit.

• The amount left unpaid on loans you have taken and the loan installments that are not paid regularly by you.

• The amount you owe on all your accounts, the types of accounts you have and all the balances in these accounts

• The total number of zero-balance accounts you have.

Credit History length – The length of your credit history covers the following information:

• The time length of your credit history.

• The length of time passed since you opened accounts.

• The length of time passed since your accounts were last active.

Credit types – The different type of credit that you have taken covers the following information:

• The different credit accounts that you have opened

• The total number of credit accounts you have opened so far.

New Credit – The new credit that you have taken covers the following information:

• The number of new credit accounts you have opened and the time elapsed from when you opened a new credit account to your previous credit account.

• The steps you have taken to get a positive credit history, after you have encountered a problem in paying your dues on time.

Now, these different factors that go into your credit report have to be in a certain proportion for you to qualify for a mortgage. The diagram below gives you a glimpse of what is required for you to quality for a mortgage from your credit score.

Who makes the Credit report?

Your credit report is prepared by credit reporting agencies. In the United States, the big three credit reporting agencies are Equifax, Experian, and TransUnion. Each of these cmpanies give credit reports on a borrower based on information they collect from third parties. The information in your credit report is used to calculate your FICO credit score.

Now, each of these companies use different formulas to generate a credit score. – While Equifax gives you the BEACON score, Experian gives the Experian or Fair Isaac Risk Model and TransUnion the EMPIRICA score. Now there is a new credit-scoring model called VantageScore, which will replace all this. This new model use one formula to create a credit score instead of three different ones and is a result of the joint efforts of the big three credit reporting agencies to adopt a single method to generate a credit score.

You can buy your VantageScores from Experian's Web site for just $6.This score ranges from 501 to 990. Each range is assigned a letter from the alphabet that goes from A to F. So, while a score between 501 and 600 would get an F, a score that’s between 901 and 990 would get just an A.

How do you if you have a good credit score?

A FICO score ranges between 300 and 850. To have a better understanding of how you are rated by your credit score, here a look at how it goes from 300 to 850.

Credit Score Percentage

350 to 499 2%

500 to 549 5%

550 to 599 8%

600 to 649 12%

650 to 699 15%

700 to 749 18%

750 to 799 27%

800 to 850 13%

A good credit score is something which is 720 or more than that. If you have a score which is 720, you are considered as a safe risk by your lender and you can get a low interest rate, and a mortgage that is high without any hassles. People with 720 and above credit scores are automatically lumped up with people who have a score of 800 and above. So, this is the ideal number that you should aim to have to show that you are financially sound enough to pay of loans. On the other hand scores below 660 place you in the sub-prime category. This is something to avoid. Please read the article on Improving Your Credit Score.