Understanding Credit Scores and Ratings

The risk-scoring process examines a consumer's credit report, assigns numerical values to specific pieces of information in the credit report, puts those values through a series of mathematical calculations and produces a single number called a risk score or credit score.

Essentially, a credit score is a statistical summary of the information described in words and figures in a credit report. The score predicts how likely consumers in a specific score range will repay their debts.

Credit reporting agencies are one source of credit scores. The main purpose of a credit score is to help credit grantors quickly and objectively decide whether to approve your credit application.

The following behaviors are likely to improve your risk score:

• consistently paying your bills on time
• keeping your overall debt at a reasonable level relative to your income
• actively and responsibly using several credit cards

The following behaviors are sure to worsen your risk score:

• consistently paying your bills late
• declaring bankruptcy
• owing a large amount of non-mortgage debt
• carrying a large number of credit cards
• applying for multiple credit cards or loans within a recent time period

FICO Scores range approximately from 350 to 875 points. The higher the number of points, the lower the risk of default. Statistics show the following:

• Below 600 are usually categorized as high risk
• Above 800 are usually categorized as low risk

In conclusion, understanding how credit scores are determined can help you when deciding to purchase or to refinance a home.

There are three categories of A credit, all of which get better mortgage rates than other scores.

The A+ credit rating is perfect credit, and usually has a FICO score above 750.

The A credit rating usually has a FICO score between 680 and 750.

The A- credit rating usually has a FICO score between 600 and 680.

Disclaimer: This is an attempt to explain FICO credit Scores and credit ratings. This is intended for informational purposes only and should not be considered completely accurate, as credit ratings may vary from lender to lender.

• Employment history, including whether you are self-employed
• Monthly debt payments versus your current income
• Savings patterns and amount of savings
• The type of loan you want
• The value of the property you want to buy or refinance
• The amount of the downpayment you plan to make or the equity that you have in your home already

All of these factors combined make up loan application profile.

Once this information is collected, the lender evaluates it to decide whether to approve the home loan. Until recently, this was done manually by reviewing each piece of information separately. Today, many lenders use automated underwriting, a computer based process that evaluates the information easily, objectively and within minutes.

The lender then views the electronic recommendations along with other information gathered to create a full picture of your loan application and makes a final decision about your ability and willingness to repay your loan.

Credit ratings and automated underwriting are widely used today because they speed up the mortgage approval process for consumers. What's more, by using credit ratings, mortgage lenders treat each person objectively because the same standards apply to everyone. Credit ratings assess each factor equally for every consumer, every time. Credit ratings do not include race, religion, national origin, or marital status as factors. Thus, credit ratings are blind to demographic or cultural differences among people.