Mortgage Refinancing - Your Credit Score

Adults in the United States have a number that virtually dictates their finances. The number is your credit score. Using credit scores as a part of processing your mortgage application started in 1995; now all financial institutions rely on it heavily to evaluate an applicant's credit-worthiness. Adults in the United States have a number that virtually dictates their finances. The number is your credit score. Using credit scores as a part of processing your mortgage application started in 1995; now all financial institutions rely on it heavily to evaluate an applicant's credit-worthiness.

Your credit score is a calculation that is based on information contained in your credit report. This resulting number allows lenders to objectively and quickly determine if you are a good credit risk and if you are diligent about repaying your loans. Scores range from 300 to 900, but most people fall between 500 and 700. The higher the score, the better risk lenders will consider you.

The score itself is relative and will be viewed differently by creditors depending on numerous factors, including the creditor's risk level, marketing goals and business practices. Your risk score will change over time as your credit history develops.

The guru of the credit-scoring world is Fair, Issac and Company, also known as FICO. They have created the most common credit scoring model that is used by the Big 3 credit companies: Equifax, Experian and TransUnion. Sophisticated mathematical processes calculate the score by assigning numerical values to various pieces of information in the credit report.

There are five categories that make up your overall score:

Payment History (35%)—Have you paid your bills on time? This rates heavily. Bankruptcies and foreclosures are also considered here.
Amounts Owed (30%)—How much do you owe and how many accounts do you have open? Rising balances, maxed out credit cards, new credit requests and high balances on installment loans are red flags.
Length of Credit History (15%)—How long have you had established credit? Starting young and paying off your balances is a bonus.
Types of Credit in Use (10%)—What’s your “credit mix?” Using a lot of finance companies with higher interest rates is a negative; so are people with no credit in use, since there is a question of whether one can manage credit responsibly.
New Credit (10%)—Have you done a lot of “credit stuff” recently? Multiple checks on your credit from companies will lower your score. Tip: If you’re shopping around for the best refinancing rates, do it fast and furious. FICO will not penalize you if there’s a short period of time that your credit is being checked. For example, mortgage inquiries made in any 14-day period will count as one inquiry.