What’s Your Score?
If you are looking to buy a new home, it’s important that you learn how to see yourself through the eyes of a mortgage lender. And one of the first things a mortgage lender will look at is your credit score. That’s because your credit score is a good indicator of your financial responsibility—the higher the score, the better you’ll look to your mortgage lender. The more you know about your credit score and how to boost it—especially if you want to qualify for the lowest interest rates–the closer you’ll be to moving into a new home. Here’s what you need to know.
First, let’s go through the basics—what exactly is a credit score? And why can it work for or against a new home buyer? The credit scores use a three-digit number and range from 300 to 850. Technically, 850 is the highest score you can get; however, the auto-lending industry uses a score that goes to 920 and there are others that go to 950. The “official” name for your credit score is your FICO Score, which is short for Fair Isaac Corp—the creators of the scoring system. Lenders, such as mortgage companies, use it to come up with your interest rate. The lower the score, the more you’ll pay in interest. Any score above 800 makes you look very creditworthy, which means you’ll get the lowest interest rate, and a lower interest rate can lower your monthly mortgage payments considerably and also lower your insurance costs. A score below 600 is generally considered as poor. Your FICO score opens or closes the door to other things too: whether or not your credit application is approved, whether or not your credit limit is increased, or how you are treated when you make a late payment.
Lenders use credit scores to identify your credit as bad, poor, fair, good, or excellent. But lenders all have their own definitions of what is a good credit score, and the type of loan you are getting also determines a qualifying score.
Credit agencies like Experian, TransUnion, and Equifax keep track of your credit history. To find out what your credit report says about you, keep in mind that you can order one free copy per year from each agency. Call 1-877-322-8228, or visit www.annualcreditreport.com. When you get your credit reports, look them over carefully. Report any errors or mistakes immediately. If there’s accurate—but negative—information on your report, you might want to try calling the creditors and ask if they’ll remove the negative comments. A creditor may be willing to do this if you have a single late payment in an otherwise perfect record.
If your credit report doesn’t make you look so good, don’t give up. You can start turning it around by doing the right—and smart—things. Pay your bills on time. Payment history is the first thing that sends up a red flag to a lender. Any bill overdue 30 days or more shows up on your credit report. If a lender sees a pattern of this, your interest rate may be raised.
Reduce your credit card balances
Maxing out your credit card does not improve your credit score. In fact, the closer you are to your credit limit, the worse your score. Try to keep your balances below 30% of your available credit.
Limit your credit applications
When you apply for credit, it flags a lender to check your credit report. And you should be aware that too many applications–and credit checks—can lower your score.
What if you don’t have a credit history at all?
This can sometimes be the case for recent graduates. If this is your situation, it’s time to start building a track record. Get a single credit card or gasoline company card before applying for a car loan or mortgage, and try to pay off your balance in full each month.
The more consumers increase their awareness and understanding of the importance and impact of their credit scores, the better and easier buying a new home can be. So make it a point to take a self-taught course in “Credit Scoring 101.” More information can be found on the websites of the three credit reporting agencies mentioned in this article. Read the information carefully and do everything to improve your own credit score. You won’t regret it—especially when you move into your new home and it’s time to make that “low” monthly mortgage payment you earned!
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