What is the Credit Score?
A credit score is a statistical representation of consumers' creditworthiness, which is based on credit history. Most creditors use the credit score to evaluate the probability that an individual is capable of repaying the debts. People with higher credit scores are more likely to be trusted when applying for additional credit. This credit score model was created by FICO, and it has primarily been used by financial institutions.
If you are going to be purchasing a home shortly, getting a free credit report is a must. By understanding the report you will be able to quickly determine if there are any errors. Keep in mind errors on your report could impact the terms you get on for your mortgage in a negative way. So, as you can see, fixing any problems will be a critical exercise.
How Credit Scores Impact Your Mortgage
People who have credit scores below 600 are considered to be subprime borrowers, and they will be charged a higher interest rate than those who have higher credit scores. Bad credit lenders are increasing the rate to offset their risk. Meanwhile, individuals who have credit scores above 700 are considered to be lower risk borrowers and will likely have the ability to lock in at lower interest rates.
Your credit scores also play a significant role in your down payment requirement. The lower your credit scores, the larger the down payment requirement will be. Even the best FHA lenders require 10% down for credit scores below 580 when their standard down payment requirement is just 3.5%.
Can you get a mortgage with bad credit? Sure, but not doing what you can to get better terms is senseless.
The Three Credit Agencies
The credit bureau gathers information that will be used to generate a credit score report. This report can be used by creditors in determining the eligibility of their clients. The data is gathered through reports from companies that issue credit cards, Banks, and customer reports.
It can also be collected or bought by the bureau. For instance, consumer credit may purchase public records information or government tax liens. Additionally, the information is also shared among the bureaus, especially when someone places a fraud alert. Three leading credit agencies collate all of this credit reporting information and then use that information during their evaluation to create credit scores.
One of the best first-time buyer tips is to get signed up with a company like Credit Karma. What Credit Karma does is a few things. The company will not only provide you with your credit report and scores but will offer trust-worthy guidance on how you can improve your financial situation.
Credit Karma has partnered with Equifax and Experian, which are reviewed below.
Equifax is an agency that is based in Atlanta and operates in 18 other countries. It has over 7,000 employees. Besides, it is dominant, especially in the eastern and southern parts of the United States, and it claims to be the market leader in most of those countries.
Experian has its US headquarters in Costa Mesa, California, with approximately 16,000 people in 39 countries. Its corporate office is in Dublin. It also promotes itself as the leading global information service center where it handles reports based on credit scores.
TransUnion identifies itself as a global leader in credit information and management services. It is based in Chicago, but its operation extends to 33 other countries. The employee population is approximately 3,700 people.
Somehow, all three agencies claim to be the leader!
Why is Your Credit Score Important?
Credit scores provide a full representation of your financial image. It sends signals to creditors about your ability or willingness to repay a debt on time. If your score is high, then you are less likely to incur financial risk, but if it is low, the lenders might question your ability to repay the debt.
Earlier, we spoke about how mortgage lenders will increase your interest rate and down payment requirement if the borrower has low credit scores. Therefore, improving the credit score may save you thousands of dollars over the life of your loan.
More and more buyers end up asking their parents to co-sign a mortgage because they are not able to get a loan on their own.
Credit Scores and Insurance Premiums
Credit scores can also help to reduce various insurance premiums. It is widely reported that auto insurance companies look at your credit scores, payment history, total debt, length of credit history, and more.
The insurance companies are not permitted to weigh other factors such as sex, marital status, age, ethnicity, address, or income.
You May Have Access to More Credit
When you have a good credit score, you are likely going to receive many more credit offers. This will be for credit cards, auto loans, and more. You may receive deals that others with low credit will not see.
How to Improve Your Credit Score
Before you think of ways on how you can improve your credit score, it is important to check on your credit score information to help you know the factors that are affecting the credit score. This will help you to make changes and start improving on your credit score. You will also need to focus on the following activities when attempting to improve your credit scores:
Pay bills on time
Paying bills on time is a good indication that will positively influence your credit score. The ability of timely payment of bills can make the lenders review your credit report positively, which will enable you to be eligible for higher loans with low interest.
Often times bills are paid late because people are not organized, and they forget. Therefore, getting set up on automatic payments or set calendar reminders will help with this problem. If you do not have enough to pay a bill in full, then send a partial payment. Being past due is better than being late.
Don’t apply for excess credit
Opening a new credit card can help you to increase overall credit scores, but when you apply for too many credit cards or have multiple inquires, it will reduce your credit score. Simply opening more accounts does not help your credit. This only works if you have no or very few accounts.
Don’t close unused credit cards
This is a smart strategy because if you close unused credit cards, you increase your credit utilization ratio, which is not suitable for your credit score.
Dispute any inaccuracies in your credit reports
It is essential to check on your credit reports from the three major bureaus which I had listed earlier.
This is because inaccurate information could be dragging your credit scores. Therefore, request for any incorrect data to be corrected as soon as possible to help you in building a good credit score.
Ask to Have Your Credit Limit Raised
A great tip is to call your credit card companies asking them to raise your credit limit. This will create a large spread between your balance and your limit, which will also lower your scores. Finally, if you have a lot of outstanding credit balances, then focus on paying mortgages first, then tackle anything you can pay off in full or the items with the most substantial minimum monthly payment.
Final Thoughts on Increasing Your Credit Score
Before you move ahead and start looking at homes, it is essential that you get your financial house in order. Putting down a home deposit only to find out, later on, there was a damaging error on your credit report will be disheartening. Put in the time and effort to get your credit scores as high as they can be. Your diligence will be rewarded for a very long time with the terms and conditions you receive from your lender.
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About the author: The above article on how to increase your credit score was written by Eric Jeanette. Eric is a twenty-five year veteran in the Real Estate industry and owns Dream Home Financing and FHA Lenders. His company provides consumers with the most up to date mortgage information and then help them to find the lender that best fits their needs.