What does your credit score mean?

A credit score is a three-digit number (consider it your financial SAT) that tells lenders and others how likely you are to repay your debts. It is a numerical, computer-generated statistical grade that quickly and objectively evaluates the information in your credit profile. It is often referred to as a FICO score after the company that originated it, Fair Isaac Corporation.

FICO scores range between 300 and 850. Higher scores are considered better scores. The higher your score, the more favorably lenders look upon you as a credit risk. An above-average score clearly demonstrates to lenders that you are a very dependable borrower. Most scores fall within the 600s and 700s. The boundary between a standard loan and a higher cost loan (also known as a subprime loan) is generally considered to be a credit score of 620.

Are credit scores important?

Your credit score does more than just determine whether you will get a loan; it is also used to determine what interest rate you may qualify for in your application process.

More than 75% of the applications for credit in the U.S. last year were decided with the help of a FICO score. Lenders consider many factors in addition to your credit score when making credit decisions. Based on your score, some lenders may be able to provide you with nearly instant approval. In addition, there can be special rates and terms offered to borrowers with above-average scores. To summarize, people with high scores are likely to repay loans more consistently than people with low scores and are therefore considered to be a very low risk.

How is your credit score derived?

A FICO score is calculated from five weighted categories. Payment history accounts for 35%, amounts owed represent 30%, length of credit history is 15%, new credit is 10% and type of credit used is 10%. Credit scores are always done on individuals, not couples. You cannot raise your personal credit score by marrying someone with better credit.

How can I improve my rating?

Do not apply for credit frequently. Having multiple inquiries on your credit report will actually worsen your score. Reduce your credit card balances. And most importantly, pay your bills on time. This simple advice is truly the most powerful and will serve you well. Late payments and accounts turned over to collection agencies can have a significant, long-term negative effect on your credit scores which will show up for several years.

Where can I learn more?

Read these two documents for more information on your credit score and how it affects your mortgage application:

• Your Credit Scores (PDF)
• Understanding Your Credit Score (PDF)

For more information, visit: http://www.myfico.com.