Tuesday, May 18, 2010

Your Credit Score Impacts Your Mortgage Rate...Ever Wonder What Goes Into Your Score?

The scoring model that calculates consumer credit scores has recently had some modifications, which may impact both the interest rates and the ability of borrowers to qualify for buying a home, refinancing a mortgage is called your FICO score. The differences include the following issues:

1. Credit Balance to Limit Ratio

The ratio of credit balance in relation to the credit available appears to have more influence on the scoring formula. Having a higher credit limit available and a lower balance could result in a better credit score. This change could especially affect borrowers if credit card issuers reduce the maximum credit limits available to credit card holders. As a general rule of thumb, a ratio of 30% or less may be beneficial to credit scores

2. Number and Type of Accounts

In previous credit formulas, having too many open accounts was viewed as a negative factor. Now, having more open and active accounts could lend a positive effect to credit scores under the new system, as long as the accounts are not new or delinquent. One potential down side of this change is that credit card issuers may close seldom used accounts, which could affect the ratio of open accounts in good standing.

3. Isolated Credit Problems

Apparently, the new credit score model could be more forgiving to borrowers showing just one major negative issue on their credit report. The scoring model calculates the severity and frequency of negative items, and isolated problems can have less impact on credit scores, as opposed to continuous and recurring late payments and delinquencies.

4. Small Collection Accounts

Collection accounts with an original amount of less than $100 should now be disregarded. Another positive benefit for borrowers with minor debts owed from parking tickets, unpaid library fines, small medical bills, or other disagreements. Infractions like these should no longer affect credit scores.

5. Authorized Credit Users

The previous credit scoring model provided that authorized users on credit card accounts could build a positive credit profile without being the primary card holder. While some authorized user data is still allowed, the new formula has reduced the ability to build credit using this method.

Provided by Donna Antonucci
Prudential Castle Point Realty

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