Scoring Your Credit - How's Your Credit Score
Choosing a lender isn't the first step in becoming a homeowner. In reality, the home buying process begins with your finances. To propel your dreams of homeownership forward, considering your credit score is a must along with the type of loan for which you'll qualify in Westchester County.
The Fair Isaac Company calculates your FICO score on the summary of your complete credit history. Most people traditionally have a score of 650, but scores range from 300 to 850. Since we've experienced an economic downturn, however, some people have seen their score drop dramatically because of underemployment, charged off credit card accounts, or credit card accounts that were closed because they don't carry a balance. Some of the pieces in reviewing your FICO score include:
- Types of Credit — Do you have a healthy mix of credit cards and loans?
- Payment History — How often do you make late payments?
- 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?
In reviewing your credit history, you'll find that you actually have three reports. Experian, Equifax and TransUnion — three of the major credit reporting agencies — use a slightly different systems to calculate your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. This means you have three scores, one for each scoring model.
Lenders want to ensure that allowing you a loan isn't a risk for them. Your credit score gives lenders an insight into what type of borrower you'd be solely because of your credit history. Because of the shift in the economy, most home buyers should have scores in the range of 700 or higher to get a satisfactory interest rate. If your score is less than that, you can still qualify for a loan, but the interest paid in the long run could be more than double the amount of someone with a higher FICO score.
There are plans to boost your score. Building your FICO score takes time. It can be rare to make a large-scale change in your FICO score with quick fixes, but your score can improve in a year or two by keeping tabs your credit report and by wisely using credit. The best way to do this is to know your FICO score. Here are some ways you can improve your credit score:
- Pay on time. Payment history is a big factor in your FICO score. It's where people who have recently experienced job loss see the biggest hit in their credit score. Yes, it takes longer to restore your credit this way, but it's the most reliable way to prove that you're able to make payments to a lender.
- Ensure that your credit history is correct. If you find incorrect items on your credit report, write to the bureau requesting 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.
- Spread your debt around. At first, this doesn't seem like a good idea. But, you don't want to have one card that is maxed out and have your remaining cards at a zero balance. It's better to have each of your cards at an even balance than to have the most of your debt transferred to one card.
- Department Store cards and gas station cards. For those who have non-existent credit or low credit, chain store credit cards and gas credit cards are ways to improve credit, increase your spending limits and stay on top of your payments, which will raise your credit. You should always avoid charging a high balance for more than a couple of months because these types of cards usually have a larger interest rate.
- Keep your cards in rotation. Whether you're just getting started with credit, or if you've got older cards, be sure to use your cards so that your accounts stay active. But, make sure you pay them off in no more than two or three payments.
Now that you know more about credit reporting, you'll be able to successfully take the first steps to homeownership, and that is improving your FICO score. Remember that when you're ready to apply for a loan to purchase a 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 Village Realty, the loan process can be a stress-free experience so you, too, can become a homeowner.
To learn more, visit www.myFICO.com, Fair Isaac's informational site and you can review all of your credit reports for free each year at www.annualcreditreport.com. And, for a small payment, you can get your FICO score from each bureau on their websites: www.equifax.com, www.experian.com and www.transunion.com.