What is a credit score and what is it designed to do? “The FICO score is the single best summary score of one’s credit worthiness,” says E-Loan President and Chief Operating Officer Joe Kennedy. A credit score number is often called a FICO score, for Fair Isaac Corp., the California company that developed the system upon which it is based. When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders want to know what risk they’d take by loaning money to you. When lenders order your credit report, they can also buy a credit score that’s based on the information in the report. A credit score helps lenders evaluate your credit report because it is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time.

*How to read and understand your credit score... The lender told you to get a copy of your credit report as part of the pre-qualifying process for a mortgage. FICO credit scores have a 300–850 score range. The higher the score, the lower the risk. But no score says whether a specific individual will be a “good” or “bad” customer. While many lenders use FICO credit scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.

*FICO scores places a value on the types of accounts you hold, as well as your credit history… FICO scores places a value on the types of accounts you hold, as well as your credit history. The formula that determines your FICO scores, however, is not disclosed to the consumer. The vast majority of people will have scores between 600 and 800. A score of 720 or higher will get you the most favorable interest rates on a mortgage.

*Credit Myths – Top 5 Credit Score Misconceptions… You want to improve your credit scores but there are so many stories about what you should or shouldn’t do, it’s difficult to determine the truth from the myths.

  1. Your score will drop by checking your own credit. Fortunately, this one is definitely not true. Checking your own report and score is counted as a “soft inquiry” and doesn’t harm your credit at all. Only “hard inquiries” from a lender or creditor, made when you apply for credit, can bring your credit score down a few points.
  2. Closing old accounts is a good idea. To close or not to close, that is the question. Many people advocate closing old and inactive accounts as a means of managing their credit. But they should think twice before closing the oldest account on their credit reports. Canceling old credit scores can lower a credit score by making the credit history appear shorter.
  3. Once you pay off a negative record, it is removed from your credit report. Negative records, such as accounts in collections, bankruptcies, and late payments will remain on your credit reports for 7-10 years. Paying off the account before the end of the set term doesn’t remove it from your credit report, but will cause the account to be marked as “paid.”
  4. Being a co-signer doesn’t make you responsible for the account. When you open a joint account or co-sign on a loan, you are taking on legal responsibility for the account. Any activity on these shared accounts, good or bad, will show up on both people’s credit reports.
  5. Paying off a debt will add 50 points to your credit score. Your credit score is calculated using a complex algorithm that takes into account hundreds of factors and values. It is very hard to predict how many points you can gain by changing one factor.

Rusty Rocus
Mortgage Expert
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