A Home Buyer's Guide to Better Credit
Yes, this credit-score arena that we are entering is confusing and mysterious for everyone, but we can figure it out together.
A person’s FICO score is a collection of their years of credit history based on an instrument developed by Fair Isaac and Company. Most people usually have a score around 650, but scores range from 300 to 850. Job loss has been common in the somewhat recent past, but FICO scores aren't necessarily adjusted "on the curve." A low score often means you can't get a decent interest rate. Some of the factors in summing up your FICO score include:
- Payment History — Do you make your payments on time? This is the biggest determinant of most people’s FICO scores.
- Credit-to-Debt Ratio — How much do you owe versus your available credit?
- Credit Inquiries — How many times has your credit history been accessed by someone other than you, like a potential employer or during a new car purchase? (I know, it’s one of many things surrounding this topic that doesn’t make sense to me either, but the frequency impacts your score. But it’s a manageable reality.)
- Types of Credit — Do you have a healthy mix of credit cards and loans? While there is so much that goes into defining “healthy mix,” here’s a guideline, according to Investopedia: “Your payment history makes up 35% of your FICO score, while your total debt owed amounts to 30%. Making up the final 15%, 10% and 10% [, respectively,] of your FICO score are the length of your credit history, any new credit that you have taken on, and the type of credit you have used.”
You actually have three credit reports (we all do). Experian, Equifax and TransUnion are three of the major credit reporting agencies and each uses a slightly different system to calculate your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. As a result, you have three scores, one for each bureau, although almost everyone refers to them all as, “FICO scores.”
Once a year you can visit www.annualcreditreport.com and review your credit history for free. Also, for a small payment, you can get your credit score from each bureau on their websites: www.equifax.com, www.experian.com and www.transunion.com.
The key thing is, lenders just want to make sure that giving you a loan is a safe move. Your credit score gives them a view of what type of borrower you are based on how you’ve handled your loans in the past. Because of the shift in the economy and the resulting tighter regulations, most homebuyers should have scores in the range of 700 or higher to get a decent interest rate. If your score is less than that, you can still qualify for a loan, but the interest accumulated over the life of the loan could be substantially more than that of someone having a stronger FICO score.
I'm used to helping people with all levels of credit history and I have excellent working relationships with every mortgage lender in Estes Park and many along the front range. Call me at (970) 214-6350 and I can help you understand your options and match you with the lenders who are best suited to your particular situation.
It can be hard to make a large-scale change in your FICO score with quick fixes, but your score can improve in time by keeping tabs on your credit report and by focusing on using the credit extended to you as a tool to raise your score. Here are a few things you can explore that could help improve your FICO score:
- Keep your cards in rotation. Whether you're just getting started with credit, or if you've a long credit history, use your cards so that each of your accounts maintains an active status.
- Keep up with payments. Be sure to pay off your balances in one or two payments. Your FICO score will plummet if an account goes to collections. While it takes time to build up your credit score with a good payment history, it's the most reliable way to prove that you're responsible enough to make payments to a mortgage lender.
- Ensure that your credit history is correct. It is can be hard to prioritize the time, but you can get a sense of how important it can be to make sure the credit reporting agencies are doing their job. If you find mistakes on your credit report, contact the bureau and ask that the item be removed. (If you have a common name or the same name as a family member, you'll want to give extra care to make sure the activity reported is correct.)
- Even out your debt. At first, this may not seem like a good idea. But, you don't want to have one card maxed-out and remaining cards at a zero balance. It reflects better on your credit score to have each of your cards at a relatively even balance than to have the bulk of your debt sitting on a single card.
- A note about department store cards and gas station cards. For those who are just beginning their credit history or who have below-average credit, store credit cards and gas credit cards are ways to start your credit history, increase your spending limits and have a solid payment history, which will raise your FICO score. (Also, be aware that these types of cards traditionally have a surprisingly high interest rate—but, then, that won’t matter because you’ll be paying them off quickly anyway.)
Lastly, keep in mind that when it's time to apply for a loan to purchase your house, you'll want to keep your lender applications within a two-week window to avoid adverse effects on your credit score. With the help of Coldwell Banker Estes Village Properties Ltd, your loan application process can be a relatively stress-free experience.
Hopefully, these tips about credit reporting will prove helpful as you take the steps to ensure your home loan is at the best interest rate you can achieve.
I work with all levels of FICO scores and can help you get back into home ownership with the best mortgage lender for you. E-mail me at firstname.lastname@example.org or call (970) 214-6350 for more information.
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