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Credit scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. The score is a number that rates the likelihood you will pay back a loan. Scores range from 350 (high risk) to 850 (low risk). There are a few types of credit scores; the most widely used are FICO? scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies.

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Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.

Different portions of your credit file are given different weights. 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 most important factor for a good credit score is paying your bills on time. Even if the debt you owe is a small amount, it is crucial that you make all of your payments on time.

A note on co-signing for family or friends: This is a risky thing. Make sure they pay in a way that gives you a paper trail: by personal check, by cashier's check, by money order or by Western Union. Paying by cash is not acceptable, even if they get a written receipt, because it does not provide sufficient proof of payment history for mortgage companies. Make sure they understand that they must notify you - in advance - if they are going to miss a payment. Not so you can scold them, but to allow you to make that payment so your credit does not suffer. This also means that you must have the ability to make that payment for them so that your credit score is not damaged.

One final point: The vehicle for which you are co-signing should be reliable but basic transportation, nothing fancy, certainly not nicer than your own vehicle, with a payment low enough to be able to make the payment by searching the sofa cushions for loose change. They may not be borrowing actual dollars from you but they are borrowing your credit and putting you at risk. It is reasonable that you have some say in the matter. For example, a $10,000 vehicle at 17.5% comes to about $250 per month.

Additionally, you will 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. Don't close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts will lower your score, for a couple different reasons. First, you are reducing the long term history of accounts that support your credit score - more history is better. Second, by closing accounts you eliminate available credit. The ratio between the credit you have available (un-used) to the credit you have outstanding (balances due) is very important and makes up 30% of your credit score. Closing unused accounts will hurt your score. Catching up and forever after paying an account on time also says something very positive about you.

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 inquiry will still appear on the credit report.

Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reasons 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.