Before deciding on what terms they will offer you a loan (which they base on their "risk"), lenders want to know two things about you: your ability to pay back the loan, and your willingness to pay back the loan. For the first, they look at your income-to-debt obligation ratio. For your willingness to pay back the loan, they consult your credit score.

The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (and they're named after their inventor!). Your FICO score is between 350 (high risk) and 850 (low risk).

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. In fact, the fact they don't consider demographic factors is why they were invented in the first place. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was developed as a way to consider only what was relevant to somebody's willingness to repay a loan.

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 reestablishing a good track record of making payments on time will raise your score.

Different portions of your credit history are given different weights. Thirty-five percent of your FICO score is based on your specific payment history. Thirty percent is your current level of indebtedness. Fifteen percent each is the time your open credit has been in use (ten year old accounts are good, six month old ones aren't as good) and types of credit available to you (installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards). Finally, five percent is pursuit of new credit -- credit scores requested.

Your credit report must contain at least one account which has been open for six months or more, 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.

How to raise your credit score

Try these five simple steps to improve your credit score…you could see dramatic results!

PAY YOUR PAST DUE ACCOUNTS

This may sound obvious but understand that credit scoring software severely penalizes you for having accounts with a past due balance. Make sure all of your accounts are current, and pay the amount that shows as being past due on the credit report. Doing this can increase your credit score by a significant amount.

TRY TO “GET RID” OF YOUR LATE PAYMENTS

Contact all creditors that have reported late payments on your credit and request a good faith adjustment that actually removes the record of late payments reported on your account. Be persistent, if they refuse to remove the late payments at first, remind them that you have been a good customer that would deeply appreciate their help. Call several times if you need to and ask for a supervisor … persistence and politeness pay off in this scenario.

REQUEST TO HAVE YOUR CREDIT LIMITS INCREASED

Contrary to popular belief, having low credit limits on a credit card can actually hurt your credit score. Having low available credit limits affects your “actual debt to available credit ratio.” For example, if you owe a total card debt of $10,000 and your total credit available is $20,000, you are only using 50% of your total credit available. But if you have credit card of $10,000 and your total credit available is $15,000, you change your ratio to 66% of your available credit being used. The lower the percentage of debt to available credit the better, as it shows you are responsible having available credit without running the balances to the maximum.

BECOME AN “AUTHORIZED USER”

If you have a short and limited credit history, you can ask someone to add you to their credit card account as a joint account holder or an authorized user. When added, the primary account holder’s credit card will appear on your credit report. Credit scoring software will treat the added account as though it is your account and you will benefit from the low balance and the long payment history for that account.

It is important to remember that being an authorized user is helpful for your credit score only if the person is carrying debt is below 10% of the credit limit on that card and if the person has had a good payment history on the card for seven years or longer. The longer the history, the better score you can expect. Being an authorizing user is potentially detrimental to your credit score if the person giving you the card either maxes out the credit or pays late, since this would report on your credit report too.

DO NOT CLOSE YOUR OLD CREDIT CARDS, KEEP THEM ACTIVE

Fifteen percent of your credit is determined by the age of the credit file. Therefore, even if your old credit cards have high interest rates, closing those cards will decrease the average length of time you have had credit while increasing your “debt to available credit ratio” as discussed above. Use the old card at least once every six months to avoid the account rating change to “Inactive.” Keeping the card active is as simple as pumping gas or purchasing groceries every few months, then paying the balance down. An inactive account is ignored by Fair Isaac’s credit scoring software, so you will not get the benefit of the positive payment history and low balance that card may have had in the past.

“Having a strong credit score is an important goal all adults should have. Your credit score impacts your buying power and your ability to get credit from those you need. Make sure you work with your Baird & Warner loan officer to review your credit report for errors or for opportunities to improve it.”

Your Key Mortgage Loan Specialist