Scoring Your Credit - How's Your FICO?
Choosing a lender isn't the first step in becoming a homeowner. The content of your wallet begins the home buying process. Saving your money for a down payment is great, but if you don't have an acceptable credit score to back it up, you could find yourself renting for another couple of years in Lomita, California until you improve your score.
The Fair Isaac Company calculates your FICO score on the summary of your total credit history. The score ranges from 300 to 850, with the majority of people normally having a score of 650. In recent years, however, some people have seen their score drop dramatically because of job loss, closed credit card accounts, or credit card accounts that were closed because they don't carry a balance. Some of the factors in calculating your FICO score are:
- Payment History — How many late payments have you made?
- Credit to Debt Ratio — How much do you owe versus your available credit?
- Credit Inquiries — Do you have too many open accounts?
- Types of Credit — Do you have a healthy mix of loans and credit cards?
Lenders want to ensure that allowing you a loan isn't a risk for them. Your FICO score gives lenders an insight into what type of borrower you'd be based solely on your credit history. Because of the shift in the economy, most home buyers should have scores in the range of 740 or higher to get an acceptable interest rate. You can get approved for a loan with a lower score, but the interest paid over the life of the loan could be more than double that of someone with a better FICO score.
Staying on top of your FICO score is the best way to ease into buying a home. Contact us and we can help you get on the right track to the home of your dreams.
You want an improved score, but how do you get it? 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 by keeping tabs your credit report and by wisely using credit. The most important thing is to know your FICO score. Here are some methods to improve your credit score:
- Pay on time. Late payments kill your credit score. It's one of the reasons people who have recently been unemployed see the biggest hit in their credit score. Yes, it takes longer to rebuild your credit with payment history, but it's the surest way to prove that you're responsible enough to make payments to a lender.
- Ensure that your credit history is correct. If you discover mistakes on your credit report, write to the bureau asking that the item be removed. If you have a common name or the same name as a family member, you'll want to pay extra attention to make sure the activity reported is correct.
- Spread your debt around. At first, this doesn't seem like a good idea. But, you want to avoid of having one card that is at the limit and have your remaining cards at a zero balance. It's better to have each of your cards at about 25% of their credit limit than to have the most of your debt sitting on one card.
- Retail cards and gas cards. For those who have non-existent credit or low credit, chain store credit cards and gas credit cards are ways to start your credit history, increase your spending limits and stay on top of your payments, which will raise your credit. You must always beware of keeping a high balance for too long because these types of cards usually have a surprising interest rate.
- Keep your cards active. Whether you have older cards, or are just getting started with credit, be sure to use your cards to make sure your accounts maintain an active status. But, be sure to pay them off in one or two payments.
Now that you're better informed about credit reporting, you'll be able to successfully take the first step in owning a home, and that is improving your FICO score. Know that when you're ready to apply for a loan to purchase a home, you'll want to keep your lender applications within a two-week window to avoid a negative mark on your credit score. With the help of Kivett Realty, the loan process is sure to go more smoothly so you, too, can become a homeowner.
To learn more, visit myFICO.com, Fair Isaac's informational site and once per year, for free, you can review all three of your credit reports at annualcreditreport.com. And, for a small payment, you can get your FICO score from each bureau on their websites: equifax.com, experian.com and transunion.com.