What is my credit score, and why is it important?

Credit scores are important to all of us. Lenders use them to determine how risky it is to extend credit to us, whether it is in the form of a credit card, a car loan, or a mortgage. It is instrumental in determining how much credit we are given and at what rate.

Credit scores are commonly referred to as a FICO^® score (Fair Isaac Corporation). Scores on this scale range from 300-850 with 850 being the best. Good credit is generally considered to be 700 and above. Best credit terms typically go to individuals with credit scores above 740.

Credit scores can deteriorate rapidly but take a long time to improve.  It is important to look into your current credit standing if you are looking to purchase a home in the next 12-18 months. That way if you do have issues, you have time to make some improvement. If you’re one of the lucky few with excellent credit, then you’ll want to keep up the great work to improve your eligibility for lower mortgage rates or better terms.

12 Tips to Improve and Maintain Your Credit Score

Payment History Section (35%)

• Pay your bills on time.
• If you’ve been behind on payments, get caught up and stay caught up.
• If you run into a situation where you are not able to pay a bill, contact your creditors to see if they will work with you. If not, reach out to a credit counselor to help put a plan together to gradually rebuild your credit.

Current Balance Section (30%)

• Keep balances low on credit cards or any other revolving credit you may have.
• Work to pay off your debt rather than moving it around.
• Don’t close unused cards as a short term strategy to increase your score.
• Don’t open new credit lines to increase your overall credit availability.

Length of Credit Section (15%)

• For those new to credit, don’t open numerous accounts in a short period of time.

New Credit Section (10%)

• If you’ve had credit issues in the past, work now to re-establish your credit by opening new accounts and paying them off on time.
• Rate shop for loans. When getting a new loan, duplicate requests are generally considered one request over a certain period of time. Ask the lender what the period of time is so you don’t have unnecessary inquiries on your credit report.

Types of Credit

• Open credit accounts only as needed.
• Be responsible with credit card accounts. Manage and pay off accounts responsibly.

Are you planning to purchase a home soon? Here are steps to take now!

1) Check your Credit Report

You are allowed to check your credit report once every 12 months from each credit agency for free.  You can get this from www.annualcreditreport.com.  These reports do not contain your credit score, but they will show you information related to your credit. This information will change throughout the year.  You might want to order reports at different times to see how your risk profile is changing.

If you are planning to purchase a house, it is important to know what your FICO^® score is. Some banks offer this as a free service. Some web sites offer generic credit scores that are not ones that lenders use. You can ask your lender which score they use to make sure you are reviewing the score that will impact you the most during the house purchase process.

2) Dispute Errors on your Credit Report

Review each section of your credit report carefully. Your identity may have been stolen or your information may have been compromised due to a data breach of a company with whom you’ve done business. Both can lead to inaccurate information on your credit report. As you are identifying potential disputes, be aware that if you have had an account that has gone to collection—even if you have paid the debt off, it will stay on your report for seven years. Accounts that have previously closed will also remain on your report.

If you find inaccurate information on your credit report, you need to file a dispute as quickly as possible as it could take up to 45 days for your inquiry to be reviewed. While the credit bureau and the credit agencies are responsible for updating inaccurate information, it can take time to get erroneous information removed. Again, file disputes early!

For information on making a dispute, visit http://www.myfico.com/crediteducation/rights/fixinganerror.aspx.

3) Setup Automated Payments or Payment Reminders

Payment history is the factor weighed most heavily in regards to your FICO^® score.  As you are getting prepared to finance a mortgage, you’ll want to make sure you pay on time every time, and make sure you pay at least the minimum balance as well. Most creditors will have an autopay feature that will ensure the minimum is paid. Other options include text, calendar, or email reminders, or setting up automatic payments from your bank account to pay your debt down.

 4) Reduce Your Debt

Setup a plan to take any leftover monthly funds, and apply them to cards with the highest interest rate. As those cards are paid off, take the excess funds and systematically use those to pay down other debts.

Are you preparing to buy a new home?

If you’re thinking of buying a home in the next 12 months, or know someone who is, keep us in mind. We can put you in contact with trusted lending partners who can help you work though any potential credit issues or get you pre-qualified for a loan. We’re happy to help in any way we can!

Sources:

http://www.myfico.com/credit-education/credit-report-credit-score-articles/

http://www.doughroller.net/credit-cards/credit-cards-that-offer-credit-scores/