When you apply for a loan or mortgage, have you ever wondered how the company decides whether or not to give you money? Almost everyone bases their decision on one version or another of a "credit score" that is based on your credit report. Most people use the FICO, which is a piece of software made by Fair Isaac and Company that looks at credit histories.
When you apply for a mortgage loan, the bank or finance company checks with a credit reporting agency to see if you have a good credit history. The credit reporting agency takes the information given by the finance company and makes a report based on its own records and other information that is public record. This information is not only put together, but it is also put into a computer programme that uses a set of algorithms to figure out how likely it is that you will pay back the loan. It figures this out by comparing the information it has about you to a profile of the "ideal borrower." Your credit score goes up the more your information matches the "ideal" profile.
When figuring out a credit score, the FICO software looks at things like:
how long you've been working at your current job
how long you've lived at your current location
how long you've had any kind of credit at all
how many loans and credit cards you have
if you have ever been late on a payment or if you have been late in the last four years.
If you've paid off all of your loans,
If you've ever had a bill sent to a collection agency, you know what it's like.
how much debt you carry
how much money you can borrow from a bank
These are just some of the things that can change your credit score. But how much does your credit score affect your chances of getting the mortgage you want?
Many financial experts say that while your credit score is a big part of whether or not a bank or finance company will give you a loan or mortgage, there are other things they look at as well. Most have their own rules for approving loans and scoring systems, in addition to the FICO. Some of these things are your work history, the job market in your area, and many other things. Based on all of these things, a company may give you a mortgage even if your credit score is low, or they may not give you credit even if your score is high.
People often think that a low credit score will stay with them forever. The opposite couldn't be more true. Your credit score is always changing. It is supposed to show a picture of your current situation and how likely you are to pay back a loan that is given to you. Because of this, any new information added to your credit report will affect your credit score, and past credit mistakes will have less of an effect the further back they are. In some cases, all you need is 4–6 months of on-time payments to raise your credit score enough to get a new loan or mortgage. You might be able to get the mortgage you want if you get a new job, get a raise in pay, or pay off one or two credit cards.
