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Your Credit Report

Lenders will also look at your credit report to help determine whether to give you a loan. Information about you and how you have used credit in the past, including your bill-paying history, outstanding debt, number and type of accounts, as well as other information, is all in this report. The data is then compared against a statistical model to determine how likely you are to repay a debt. The end result of this modelling is a number or credit score that measures the statistical likelihood that you will pay off a debt in a timely manner.

Lenders will not only use this score to determine whether to make a loan at all, but may also give better rates to borrowers with better scores.

If you would like a copy of your credit report, you can order it from one of the three major credit reporting agencies:

Each of the three agencies may have slightly different information on you, so you may want to check all three to make sure that each report is accurate. Each agency also has a proprietary scoring system, so the scores will not all be the same. In general, however, a high score for one agency should translate into a high score for the others.

Tips for maximizing your credit score

There are a number of simple things that you can do to help maximize your credit score before applying for a loan.

Two factors that weigh heavily into your score are your average account age and number of hard inquiries. The average account age refers to the average length of time that you have had a credit account, such as a previous mortgage or credit card, open. For purposes of the credit scoring model, the longer you have had an account open, the better. A hard inquiry is recorded against your credit report when a potential lender looks up your credit, usually in reponse to a credit application on your behalf. To maximize your credit rating, then, you want to avoid applying for too many credit cards or new lines of credit in the six months leading up to your mortgage application.

Another important element in your credit score is your credit utilization. Credit utilization is defined as the total revolving credit debt divided by the total available revolving credit debt as a percentage. The higher this percentage is, the closer you are to maxing out your available credit, which negatively impacts your credit score. So another important step you can take to increase your credit score is to pay off as much of your outstanding debt as you can afford.

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