Credit Scoring - How it Works?
Credit rating helps lender to statistically measure assess the users credibility and to ascertain that the borrower is capable of repaying the loan amount. The Credit Score ranges from 350, which means high risk to 950, which means low risk. The higher is your score the better is your rating.

The formula to analyze credit score was developed by Fair Isaac & Company, Inc. and hence is thus known as FICO Scores. The credit score is the manifestation of the information contained in your credit profile and does not represent income, savings, down payment amount or demographic factors like gender, race, nationality or marital status.

Timely payments increase your ratings while late payments decrease the same. Multitude of factors is responsible for your credit rating and different factors have given different weights to determine the score. They are:

• 35% - Previous credit performance (specific to your payment history)
• 30% - Current level of indebtedness (current balance compared to high credit)
• 15% - Time credit has been in use (opening date)
• 15% - Types of credit available (installment loans, revolving and debit accounts)
• 5% - Pursuit of new credit (number of inquiries)

The maximum weight is given to the timely payment of bills. Even the amount you owe is small, what matters is whether you pay it on time or not. In addition, you may want to keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Do not close unused cards as a short term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.

Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for scoring purposes for the first 30 calendar days; then, multiple inquiries within the next 14 days are counted as one. Each query will still appear on the Credit Report.

Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act.

Your Credit Report must contain at least one account which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.