What’s Your Number? How Credit Scores Work

When you apply for a mortgage, your credit profile is often more important than the income and assets you can show a lender.

Your credit report is a picture, over time, of how you have managed credit. This gives a lender an idea of how you’ll manage the loan if it grants you a mortgage.

How does the lender get this report? Three credit bureaus manage credit data: Experian, Equifax, and TransUnion. When you borrow money, charge something, or make a payment, your creditor notifies one or all of these bureaus.

When you apply for a mortgage, your lender orders a credit report, which contains data from all three bureaus. Each of the three bureaus generates a credit score using a scoring model (they all use the same model), and this is included on the report.

At times, different bureaus may have different information, and hence will report different scores. The lender will use the middle score of the three as your “credit score” when evaluating your borrower profile.

There are many components that make up your credit score. Two of the most significant are your recent payment habits and your balance-to-limit ratio.

Your recent payment habits (the past one to two years) give the lender an idea of how well you stay on top of your monthly obligations. The balance-to-limit ratio takes a different perspective. It shows how much debt you have in relation to how much credit you have available.

An example of this would be multiple maxed-out credit cards. Even if you are paying all of your bills on time 100% of the time, you still may be overextended, and this will lower your credit score.

If you’d like to find out more about how credit scores are calculated or what you can do to affect your score, contact your mortgage professional for details.