Understanding Credit Scores

The risk-scoring process examines a consumer's credit report and assigns a numeric value to specific pieces of information. Through a series of mathematical calculations, these values produce a single number called a risk or credit score.

Essentially, a credit score is a statistical summary of the information described in words and figures in a credit report. The lender may examine your past credit history to evaluate how promptly you pay your bills and look at other factors as well, such as the amount of your income, whether you own a home, and how many years you have worked at your job.  The resulting score predicts how likely it is that consumers in a specific score range will repay their debts.

The main purpose of a credit score is to help credit lenders decide quickly and objectively whether to approve your credit application.

You can improve your risk score by:

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

You will worsen you risk score by:

• 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 score, the lower the risk of default. Statistics show that:

• Scores below 600 are usually categorized as high risk
• Scores above 700 are usually categorized as low risk

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