Your Credit Score Really Counts

By Debbie Wilson Columnist

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Relatively few people purchase their house for cash--to buy your home you'll probably have to rely on some form of credit. In order to qualify for a new home loan with good terms, you need to have a decent credit score. But what is a decent credit score and how can you find out what your score is?


Credit Scores Explained

A credit score, also known as FICO, is a three digit number created by the Fair, Isaac & Company. It measures the probability that you will pay back the money you have borrowed. Credit scores range from 350 (extremely high risk) to 850 (extremely low risk). The higher your score, the stronger your credit rating. Most Americans' credit scores fall between 500 and 700 points. If your score is higher than 680, it is considered good. If it is below 600, it will most likely be much harder for you to obtain a mortgage home loan.

Obtaining Credit Reports

Your credit history determines your credit score. Credit reports are processed by three major credit bureaus: Equifax, Experian, and TransUnion. As you obtain credit and handle your debt, credit information is compiled, by these credit bureaus, weighted, and translated into a score. The weighting of your debt, however, it not equal. Instead, there are five major factors that are considered:
  • » 5% Pursuit of new credit
  • » 15% Time credit has been in use
  • » 15% Types of credit available
  • » 30% Current level of indebtedness
  • » 35% Past credit performance

Good Credit vs. Bad Credit

The difference in mortgage rates between having a good credit score or a bad credit score can be extremely significant. For a $200,000 mortgage loan, an increase of two percent in interest can add nearly $100,000 in interest expense over the life of the loan. So being aware of where your credit score stands and finding ways to improve it can be well worth your effort. Just think, you can pay this extra money to the lender, or you can put it in your pocket. Which would you prefer?


About the Author
Debbie Wilson owns and operates a lakeside resort. Her previous experience includes profitability consulting for a national healthcare company. Debbie holds a B.A. in Business Management with a minor in Physical Education.

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