Credit Scoring

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In a nutshell, credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood an individual will pay back a loan. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, number of inquiries.

 

Fair, Isaac & Co. recently revealed that its widely used FICO formula is based 35 percent on a borrower's payment history, 30 percent on debt, 15 percent on how long the applicant has had credit, 10 percent on credit type, and another 10 percent on the pattern of credit use; using this formula, 20 percent of the population is left with scores under the prime-rate cutoff of 620.

Credit Score Breakdown

 

As companies utilize credit scoring, the loan approval and closing time will be compressed for most consumers. In the future, a high FICO score may be your ticket to a speedy and competitively priced mortgage loan.