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Steps to the Home Buying Process – Credit Scores and Credit Scoring

A credit score is simply a numerical representation of your credit worthiness. Your credit score refers to your FICO credit score, developed by Fair, Isaac & Co. to rate you as a credit risk. FICO scores generally range from 300 and 850.

For most loan programs, scores below 620 are ranked below average; between 620 and 680 are average; higher than 680 is above average. Excellent scores are in the 700’s. The higher the score, the better-the higher the credit score, the better the credit risk.

When you apply for credit your score does not come directly from FICO. Instead each bureau has its own version of the rating system with its own name: Equifax is called Beacon, Trans Union is Empirica and Experian is Experian/Fair Issac. However, the calculations used to determine these scores are different for each bureau and the formula is not disclosed to the consumer.

Most lenders pull a tri-merged credit report. This provides the lender with scores from all three bureaus. In general, the middle of the 3 scores is used to determine eligibility. In a case where there are two or more borrowers, the lowest middle score is used.

How is my score determined? Below are the approximate percentages that determine your FICO Score.

– Payment history (35%) If you have any accounts sent to collection or bankruptcies, they will have the largest impact on your score.
– Outstanding Debt (30%) High balances on credit cards, or more precisely, balances that are close to your credit limit can negatively affect your score. Keep your balances below 30%.
– Length of your credit history (15%) How long have your accounts been open? The longer, the better.

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