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Creditis Only One of the Five C’s, But…

July is sailing by, as every month tends to do, and the press is filled with news about credit score trends, credit score costs, and the implications of credit scores on the lending process. Orion’s brokers realize that credit scores are easy to understand, like a letter grade of “A” being better than an “A-,” but aren’t the most important thing in life as some companies or reporters would have you believe. In fact, experienced brokers will tell clients that a credit score is not even used by Freddie Mac and Fannie Mae in determining a borrower’s creditworthiness.

“What is my credit score?” That is the question that the vast majority of people don't know the answer to, according to studies by MGIC and others. Nor should they be expected to: our brokers can assist in obtaining the credit score, analyzing it, and determining its impact on a home loan. It is good, however, for Orion’s broker clients to understand how a FICO, or similar, credit score is calculated and know some credit-related facts like the average national credit score.

Essentially, a credit score is determined by five factors of differing importance. A credit score is calculated using several factors, primarily including payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), new credit (10 percent), and credit mix (10 percent). These components help determine the creditworthiness based on credit report information and also tell borrowers why it is important not to do anything to change their score during the loan process.

The first, and largest portion is payment history: how often a person pays their accounts on time with late payments possibly leading to a lower score. The next biggest chunk is how much they owe, or how they put it, “how much of your total credit have you used?” By lowering debt, a client can receive a better credit score. How long your client has had credit history takes up 15 percent of their total score. If they have a longer history with responsible credit (a solid first two chunks) they will likely have a higher score. 10 percent comes from new credit lines. Opening several accounts in a short time can lower your client’s credit score. I’m not sure how well America listens to that as the average number of open credit cards per consumer is 9. The final 10 percent comes from the types of credit used: car loan, HELOC, a credit card, and so on.

Ona side note, most Americans rarely check their credit score. This apparently can affect relationships. One study tabulated that 57 percent of women and 47 percent of men said, “it was important to know a partner’s credit score before getting seriously involved.”

Relationships aside, every borrower should use a good broker to help them analyze their credit and see if any steps should be taken to improve their credit score. A better score will result in better home loan pricing, and that benefits everyone.

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