The credit score is a unique number that helps lenders and others concerned to decide what are the chances that you will pay your debts. One kind of credit score is the FICO score (English acronym for Fair Isaac Corporation Inc., the company that developed a common method of scoring). The FICO score ranges from 300 to 850.
When you apply for a mortgage, it evaluates your credit score. This score can also be used to determine the interest rate on your mortgage.
Your credit score is based on various types of information contained in your credit report:
- Your payment history – Late payments will decrease your credit score.
- The amount of debt you owe – If your credit cards have reached the limit, your credit score may decrease, even if the amount you owe is low.
- The time you take your credit use – The time you used credit is important. If you demonstrate that you manage your credit wisely and keep low balances on credit cards and pay your bills on time, your credit score will be affected positively.
- The frequency with which you are applying for new credit and new debt is accumulated. If you have applied for several credit cards at the same time, your credit score may decrease.
- The types of credit you currently use. This includes credit cards, retail store cards, installment loans, finance company accounts and mortgages.
Your credit score is only one factor when considering a loan to buy a house. Mortgage lenders also study your credit report, employment history, income, the ratio between your debt and income and the value of the house you want to buy.
What Do The Numbers Mean?
FICO does not offer the public the specific statistics related to credit scores. However, it does provide some general numbers that can help you understand how to interpret your credit score:
Credit scores between 770 to 850 are considered very good, and usually the best loan rates are available to borrowers within this range.
Credit scores above 700 are considered good, according to FICO, and most borrowers have credit scores in this range. The average credit score is around 725.
If credit scores are below 650, lenders receive higher interest rates when applying for credit.
It is important to remember that credit scores are like a snapshot of your credit at any given time. The “snapshot” shows your credit based on information available at that time. By using credit wisely, you can improve your score over time.