You may be wondering, what constitutes good or bad credit and why? A credit bureau or credit-reporting agency collects information about your payment habits from all kinds of sources. The bureau stores this information in a computer database.
The three leading credit-reporting agencies in the US are Experian, Equifax and Trans Union.
When applying for a mortgage, the lender will normally order your credit report from all three companies just in case one credit bureau has information that another may not have received. This is called a tri-merged report.
These credit-reporting agencies assign a score to your credit. A credit risk score is a statistical summary of the information contained in an individual’s credit report. The most well known is the Fair Isaac or FICO score.
A mathematical process calculates this score by assigning numerical values to pieces of information in your credit report. FICO scores typically range from 375-850.
The higher the score, the better the credit rating. Usually any credit score under 620 can be considered bad credit.
What that means is that you may not qualify for a “conforming “ mortgage, but that does not mean that you won’t qualify for a mortgage at all.
There are many programs for applicants with scores ranging from 500-620 and these mortgages are called “non-conforming” loans. These are the types of mortgages you’d get for buying homes like Spring Branch foreclosure homes.
As you would expect, the interest rates only get higher as your credit score goes down. The news is still good though! Interest rates are at historic lows and even the rate you get with a low score is still pretty good compared with the interest rates over the last 40 years.
You do have control over your health of your FICO score.
Your risk score changes over time and you can affect that score by paying regularly and on time. Lenders see a history of on-time payments as an indicator of good credit risk.
Also, if you have a low credit score only because you haven’t had any credit, apply for credit such as with a department store. Then, use that credit card.
You can still avoid any interest charges by paying before the due date on your bill.
So, if you don’t know your score, the first step is to check your credit record. Anyone can obtain copies of their own credit report free of charge if they have been turned down of credit recently.
These bureaus will also provide instructions on how to read the report and how to dispute any inaccuracies it contains.