If you've been searching for a new Champaign, Illinois home then I'm sure you've heard the words "credit score" quite a few times. With the Illinois lenders tightening their requirements it is more important than ever.

You credit score is commonly referred to as a FICO score, and is a proprietary tool created by the Fair Isaac Corporation. This is not the only way to get a credit score, but the FICO score is the measure that is most commonly used by lenders to determine the risk involved in a particular loan.

Due to the proprietary nature of the FICO score, the Fair Isaac company does not reveal the exact formula it uses to compute this number. However, what is known is that the calculation is broken into five major categories with varying levels of importance. These categories, with weigh in brackets, are payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%) and type of credit used (10%). All of these categories are taken into account in your overall score - no one area or incident determines your score.

The payment history category reviews how well you have met your prior obligations on various account types. It also looks for previous problems in your payment history such as bankruptcy, collections and delinquency. It takes into consideration the size of these problems, the time it took to resolve them, and how long it has been since the problems appeared. The more problems you have in your credit history, the weaker your credit score will be.

One of the largest components that is reviewed is the amount that you currently owe to lenders. While this category focuses on your current amount of debt, it also looks at the number of different accounts and the specific types of accounts that you hold. This area is focused on your present financial situation, and a large amount of debt from many sources will have an adverse effect on your score.

The other categories (length of credit history, new credit and type of credit used) are fairly straightforward. The longer you have a good credit history, the better. Of course, common sense dictates that someone who has never been late with payment over twenty years is a much safer bet than someone who has been only made on time payments for a few years. Also, people who apply for credit a lot probably already have financial pressures causing them to do so, so each time you apply for credit, your score gets dinged a little. Finally, a person with only one credit card is less risky than a person with 10, so the more types of credit accounts you have, the lower your score will be.

It is important to understand that your credit score only looks at the information contained on your credit report and does not reflect additional information that your lender may consider in its appraisal. For example, your credit report does not include such things as current income, debt to income ration, and length of employment. However, because your credit score is a key tool used by lending agencies, it is important that you maintain and improve it periodically.

Your credit score is a major factor when purchasing a home, especially in this tight lending environment. Contact me today if you have any questions about your credit score.

Rose Price, CIPS, CRP

Prudential Landmark Real Estate
Champaignrose.com

 

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