Credit is an important factor in having the ability to obtain a mortgage or other loan for a big ticket item. To most people how a “credit score” is determined is a mystery. Most people do not know what their score is unless they apply for a loan or run a report through one of the credit unions.

What is the purpose of a credit score? Having a scoring method has advantages because it weighs many factors and can provide an objective picture for the financial institutions seeking information about you. These advantages are being able to obtain a loan fast, fairer credit decisions, poor credit decisions from your past will not haunt you forever, more credit is available making credit rates lower overall.

According to FICO the 5 categories that DO affect credit score are: 1) Payment history; 2) Amounts owed; 3) Length of credit history; 4) New credit; and 5) Types of credit used. Please click here for more specific information on these categories.

According to FICO, the following information does NOT affect your credit score: race, age, color, religion, national origin, sex and marital status, salary, occupation, title, employer, date employed or employment history, where you live, any interest rate being charged on a particular credit card or other account, any items reported as child/family support obligations or rental agreements, certain types of inquiries (requests for your credit report from employers, promotional inquiries, or administrative inquiries from lenders, any information that is not proven to be predictive of future credit performance, whether or not you are participating in a credit counseling of any kind.

What is recommended to optimize your credit score: 1) Pay your bills on time; 2) If you have missed payments, get current and stay current; 3) Be aware that paying off a collection account will not remove it from your credit report.; 4) If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor; 5) Keep balances low on credit cards and other “revolving credit”; 6) Pay off debt rather than moving it around; 7) Don’t close unused credit cards as a short-term strategy to raise your score; 8) Don’t open a number of new credit cards that you don’t need, just to increase your available credit; 9) If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly.

When establishing new credit here are some tips: 1) Apply for and open new credit accounts only as needed; 2) Have credit cards - but manage them responsibly; 3) Note that closing an account doesn’t make it go away.

CNN reports in their money watch how some of the credit regulations are changing and could positively affect your credit score.

Tags: first time home buyer, Mortgages, Mortgages and Finance