Understanding credit scores benefits home buyers

“The credit report is the primary document used to determine the borrower’s credit worthiness and the main factor in determining which loan program a consumer will qualify for,” said Chris Sander, president of the Missouri Association of Mortgage Brokers, in a news release.

The MAMB, a nonprofit organization of more than 400 mortgage brokers and professional affiliate members, offers categorized information about credit reports and their affect on the borrowing process.

According to the MAMB, there are five main categories in a credit report:

• Payment history accounts for approximately 35 percent of the weight of the credit score. The first thing lenders look for in a borrower is how timely the consumer has been in paying past credit accounts. The fewer late payments, judgments, liens or collections, the less likely the consumer will be late on future transactions.

• Credit utilization and debt account for approximately 30 percent of the weight of the score. How a consumer uses credit and how much credit is available can raise or lower a credit score. As a rule, consumers should try to keep balances under 30 percent of the amount borrowed.

• Length of credit history accounts for 15 percent of the credit score. The more established and longer the consumer’s credit history, the higher the score. If you do not have a long credit history it does not necessarily mean you are high credit risk. Today, automatic underwriting systems look for at least two active accounts that have been open for at least six months.

• New credit inquiries account for approximately 10 percent of the weight of the score. Applying for a new credit card triggers an inquiry into your credit history, which lowers your credit score between one and two points. Each time you open a new account for a new credit card your score drops one to four points. On a side note, when shopping for an auto loan or mortgage, similar credit inquiries made within a 14-day period will only show up on an account once.

• Types of credit used accounts for approximately 10 percent of the weight of the score. The score will consider the mix of revolving, installment and mortgage accounts. Department store lines and bank lines score higher than finance company lines of credit.

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