The Impact of Your Credit

Everyone talks about getting a favorable rate on their mortgage. One of the most important factors in getting that favorable rate is your credit score. Here is some helpful information about how credit scores are determined and can be improved.

What Your Credit Score Means

Your credit score is essentially a standardized way for lenders to determine how risky it is to lend you money. The better the score, the lower the risk. The lower the risk, the lower your interest rate. In order to get the most favorable rate on your mortgage, you will want to have the best credit score possible.

Most lenders use a standard "grading" system to categorize credit scores. While some lenders develop their own systems for classification of scores, below is a general guide to score categorization:

Credit Score Grade

Credit Score Grade
800 - 850 A+
750 - 799 A 
700 - 749 A-
650 - 699 B 
600 - 649 C 
550 - 599 D 
500 - 549 E 
300 - 499 F 

How Your Credit Score Is Determined

Your credit score is formally known as a Fair Isaac Corporation Score (commonly called the FICO® score). It ranges from 300 to 850 and is calculated according to the following risk factors:

Payment History (35% of score)

  • Payment information on several types of accounts.
  • Public record and collection items.
  • Details on late or missed payments – specifically:
    • How late they were;
    • How much was owed;
    • How recently they occurred; and,
    • How many there are.

Amounts Owed (30% of score)

  • Amount owed on all accounts.
  • Amount owed on different types of accounts.
  • Whether you are showing a balance on certain types of accounts.
  • How much of the total credit line is being used.
  • How much of installment loan accounts is still owed.

Length of Credit History (15% of score)

  • How long your credit accounts have been established, in general.
  • How long specific credit accounts have been established.
  • How long it has been since you used certain accounts.

New Credit & Inquiries (10% of score)

  • How long it has been since you opened a new account.
  • How many recent requests for credit you have.
  • Applying for too much credit in a short period of time can hurt your score

Types of Credit (10% of score)

  • What kinds of credit accounts you have and how many of each.
  • Total number of accounts you have.

How You Can Improve Your Credit Score

If your credit score is keeping you from getting a better mortgage rate, here are a few things you can do to clean up your credit history.

Obtain a complete copy of your credit report from the three leading reporting agencies:

Review your credit report line-by-line, specifically searching for errors, omissions, duplications and "common name" errors.

  • If you encounter errors, you should write out exactly what should be corrected and why. You are able to add 100 words or less to reports on questioned items.
  • You can also find assistance through credit counselors, who are available through the various credit bureaus.

Federal law requires credit bureaus to contact all creditors on items where mistakes were made. According to the Fair Credit Reporting Act of 1971, if these firms fail to respond to you in writing within 30 days, they are obligated to remove the disputed items from your records.

Here are some additional things to keep in mind:

  • The Fair Isaac Resolution Resources Helpline is 1-800-777-2066.
  • Most merchants are willing to negotiate customized repayment plans for those that find themselves with considerable debt.
  • Chapter 13 bankruptcies stay on an individual's record for 7 years.
  • Chapter 7 bankruptcies stay on an individual's record for 10 years.

Judgments, Garnishments or Liens

Liens, garnishments and judgments are typically indicators of an unstable borrower. Any judgments, garnishments or liens must be paid in full. Prior to closing, proof that the judgment, garnishment or lien has been cleared must be obtained; this can be reflected through a clear credit report supplement or a paid receipt form from the creditor. IRS tax liens also must be paid in full. Standard property tax liens do not have to be recorded as paid in full since they are not yet due or payable. Also, the borrower is obligated to provide a satisfactory letter of explanation.

Delinquent Child Support

Any outstanding child support payments must be brought current, and specific documentation from the credit-reporting agency stating this fact must be in the file with no exceptions. Because of the seriousness of the delinquency/default, which in many states can cause incarceration, a letter from the court or the legal authority responsible for collection in the city/state (e.g. district attorney, sheriff, etc.) is acceptable. A letter from an ex-spouse and copies of personal checks are not acceptable, nor is an agreed-upon, but not yet completed, payment plan.