YOU NEED TO KNOW YOUR
BAD credit can disrupt
your life. That’s why, in addition to
paying your bills on time, it’s important to check the accuracy of your credit
reports several months before applying for a mortgage. And these days, you also can find out your
credit scores - the numbers lenders use to decide how likely you are to repay a
loan.
WHY do you need to know
you scores? Because the lower your
scores, the higher risk you are to a lender and the less likely you are to get
the best rates on loans. Checking your
score with Equifax, Experian or Transunion
(the 3 major credit reporting companies) before you apply for a loan can save
you money if you catch a mistake and correct it.
MOST lenders initially use
the Experian score system known as FICO, developed by
Fair, Isaac and Co. Several factors go
into your score, including bankruptcies, how many years you’ve had credit and
the number of new credit applications you’ve made. Below is a guide to let you know how you
score may be perceived by a mortgage lender:
720 and over:
Wonderful. You are the top with the best rates and terms offered to you.
700-719: Excellent
score. You are a desirable borrower.
680-699: Good
credit. You should be in a strong shape
to buy.
660-679: OK
credit. Don’t look for exceptions.
640-659:
Borderline. OK if everything else
is strong.
620-639:
Weak. The rest of your file must
be perfect.
600-619:
Difficult. Needs
some work, or special program.
Below 600:
Trouble. Try to fix your credit.
FIVE FACTORS
COMPRISING CREDIT SCORE
PAYMENT HISTORY: 35%--Paying debt on time and in full has a positive
impact. Late payments, judgments, and
charge-offs have a negative impact.
Missing a high payment has a more severe impact than missing a low
payment. 30 day late in the last 12 months can lower a score 70-100 points.
CREDIT UTILIZATION: 30%--Lower balances on more credit cards is better than higher
balances on a few. Optimum balance is
30%-35% of credit limit.
CREDIT HISTORY: 15%--length of time since credit lines were established. Can look into age of the oldest trade lines and payment histories
for the last 10 years.
TYPE OF CREDIT USED: 10%-- A mix of
home mortgages, auto loans, and credit cards is more positive than a concentration
of debt from credit cards only.
INQUIRES:
10%--Quantifies the number of
inquiries that have been made on a consumer’s credit history with a six-month
period as well as new account openings. Same industry inquires within
a 14-day period counts as 1 inquiry.
CREDIT COUNSELING STEPS TO IMPROVE CREDIT SCORING
TIME: Set a
time period. (Ie. 6-months, 12 months, 18
months). The more time that passes the better things get.
PAYOFF-PAYDOWN EXISTING DEBT: Having a difference of
20% between the limits of your credit cards, and the balances of your credit
cards can help to improve your score.
DO NOT SEEK NEW CREDIT: Opening new credit will
bring down the average of your liabilities. As stated above the average age can
affect your score by about 15%.
PAY YOUR BILLS ON TIME: If you make a late
payment (1) month the plan for improvement starts all over again.