Home
Here’s What You Need to Know About Credit Scores in Order to Get The Best Rate Possible When Refinancing Your Mortgage Loan!
The More You Know, The Better Prepared You Will Be To Secure the Lowest Home Loan Rates
-
What is a Credit Score?
-
How Can I See My Credit Score?
-
What Do The Numbers Mean?
-
What Can I Do To Increase My Score?
A Little Background
A credit score is a numercial interpretation of a person’s creditworthiness based upon a statistical analysis of that person’s credit report; meaning the liklihood that a particular person will pay their bills. The score is primarily based on credit report information, typically sourced from one or more of the three major national credit bureaus, Equifax, Experian and Trans Union.
Though credit scoring systems go back about a hundred years, they came into public purview in 1971 with the passing of the Fair Credit Reporting Act (FCRA) which was a response to credit issuers who used credit scores as a reason to deny credit to otherwise creditworthy individuals. This legislation for the first time allowed the public to view, dispute, and correct, entires on their credit reports. It also forced credit reporting agencies to report positive credit histories rather than just negative credit information.
The oldest, and most well known credit scoring service is the FICO score, created by Fair Isaac, a Minneapolis-based firm, in the 1980’s. It has also been marketed as the “Beacon” score by Equifax over the years. The FICO score is used by most mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations. Each credit bureau has it’s own credit scores. These include the Beacon 5.0, Empirica, and Classic 98. In addition, many large lenders, including the major credit card issuers such as Capital One, have developed their own proprietary scoring models.
How Can I See My Credit Score?
Americans are entitled to one free credit report within a 12-month period from each of the three national credit bureaus but are not entitled to receive a free credit score. The three credit bureaus manage Annualcreditreport.com, where users can get their free credit reports. Keep in mind this is different from similar web sites that charge add-on fees. Credit scores are available as an add-on feature of the report for a fee. Obtaining a free credit report, or buying a credit score from annualcreditreport.com has some disadvantages relative to alternative ways to obtain your report or score. If the consumer disputes an item on a credit report pulled using the free system, the credit bureaus, under the Fair Credit Reporting Act (FCRA) now have 45 days to investigate, rather than 30 days.
Alternatively, consumers wishing to obtain their credit scores can in some cases purchase them separately from the credit bureaus or can purchase their Fico Scores/Reports directly from Fair Isaac. Credit scores (including FICO scores) are also made available for “free” through subscription to one of the many credit report monitoring services available from the credit bureaus or other third parties, although to actually get the scores for free from most such services, one must use their credit card to sign up for a free trial subscription of the service and then cancel before the first monthly charge is assessed.
Under the FCRA, a consumer is entitled to a free credit report (but not a free credit score) within 60 days of any “adverse action” (e.g. being denied credit, or receiving substandard credit terms from a lender) taken as a result of their credit rating.
What Do The Numbers Mean?
The FICO credit score ranges between 300 and 850. A couple of years ago, your credit score didn’t mean all that much. Whether you had a credit score of 520, widely considered to be a low score, or 780, considered high, you were able to obtain mortgage financing and virtually the same rates. That all ended with the sub-prime meltdown.
Today, in orcer to secure the best rates on a convetional mortgage loan, a borrower needs to demonstrate a median credit score of 740 or higher. A minimum of roughly 640 is needed to get a loan, but it will cost you dearly in additional fees and/or a higher rate. FHA and VA loans afford the borrower slightly more flexibility in credit scoring. Mortgage lenders have moved to a system of “risk-based pricing” where the better your credit score, the better your chances of qualifying, and the better your rate.
How Can I Improve My Credit Score?
The most simplistic answer is to pay your bills on time, and for an extended period of time. There are some “credit repair” companies out there who will promise to turn your credit completely around in 30 days. This is misleading and fraudulent advertising in most cases. In fact the 1997 Credit Repair Organizations Act served to clamp down on some of this activity. Nevertheless, there are simple steps you can take to improve your scores legally, and on your own.
- Obtain a copy of your credit report
- Verify your social security number and address. In many cases, people with common names will have merged credit files. This can inflate your debt service and easily lower your credit score. Furthermore, indentity theft is on the rise so you want to make sure your credit history is, in fact, yours.
- If there are any errors, you may dispute them, but keep in mind that the credit bureau will not just remove genuine late payment indicents, charge-offs, or judgements. You will need to show proof of your payment and its timing.
- Check to insure your credit limits are accurate. A recent study found that 46% of participants had inflated or missing credit limits listed which serves to inflate the amount of debt a borrower is carrying.
- Insure that closed accounts, like a paid off car loan, are indeed closed.
- Don’t cancel a credit card that you have had for a long time just because of poor service or a slightly higher interest rate on balances. Credit scoring systems love accounts that have been open a long time.
- Don’t allow open accounts to sit idle. Charge a $10 movie ticket if you have to and pay the balance off early. This will show on-time payment and keep your reporting recent.
- Recency is King. Credit bureaus and lenders alike weight your recent credit history more havily than your past. Paying your bills on-time for twelve months or longer will have a positive impact on your credit file.
- Don’t necessarily pay off small, old collections if they don’t have a recent reporting date. Paying them off might actually hurt your credit score if the creditor starts reporting again.
To receive our FREE Report “Understanding Your Credit Score” which offers additional tips and insight, complete the information at the top right of this page or complete the form below.
Ultimately, there are no quick fixes to a low credit score. Most often, time, coupled with a commitment to paying your bills on time will make the greatest impact on your credit score and enable you to secure the best rates on a home mortgage.
If you have questions or concerns regarding your credit, but are looking for a mortgage, complete the form below and we will be happy to provide a FREE telephone consultation on how to improve your chances at securing a home mortgage loan
No comments
