Understand Credit Scoring

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Three.  Simple.  Digits. 

Did you know your credit/FICO score can stand between you and the home you’re looking to buy? 

When people talk about their “credit score” they’re talking about three numbers ranging from 300 (very bad) to 820 (very good) that you can find on your credit report which is a list of all your credit accounts including the payment history of those accounts.  Three credit bureaus -- Experian, TransUnion and Equifax – compile and maintain this data.  "The credit report does not rate your credit," says Maxine Sweet, Experian's vice president of public education. "It simply lays out the facts of your history."  

How is your score determined? 

The formula takes into account payment history, how much you owe vs how much total credit you have available, the types of credit and frequency with which you apply for credit: 

  • Payment History - 35 percent: Making payments on time, no missed payments on all credit accounts, and having a long credit history are key items lenders look for. Lenders believe that applicants with a higher score are more likely to make their loan payments on time. 
  • Amount Owed- 30 percent If you’re maxed out on all your credit cards that will lower your score.   
  • Length of Credit History - 15 percent:  If you’ve maintained credit for a long time that will help your score. 
  • New Credit - 10 percent: Opening several new credit accounts in a short period of time can lower your credit score.  
  • Types of Credit in Use - 10 percent: Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered. 

You can buy credit reports separately from each company. The company will also provide you with a credit score. However, it won't be you FICO® score, which is what you really need to know. 

Get your FICO score from www.myfico.com starting at $19.95.   You’ll get a full credit report and FICO® Score 8, the FICO® Score most widely used by lenders, based on that report, as well as additional FICO® Score versions, including a prior base FICO® Score version — often used in mortgage decisions — and industry-specific auto and bankcard versions. Plus, each report comes with an interest rate estimator. See how your score range may impact your interest rate on a home loan. 

Need to raise your credit score?  Read on. 

It won’t happen overnight, but it can be done fairly quickly and recent “good behavior” is scored in your favor.  Here are some tips:  

  1. Payment history makes up the largest part of your FICO score so PAY BILLS ON TIME!  If you have a late payment, call the lender and see if they’ll remove this information from your records. 
  1. When you pay down your balances you’ll see the biggest improvement in your score because it lowers the amount of credit you’re using.  Remember, the smaller percentage of available credit you’re using, the better.  Some people suggest never using more than 50 percent of your limit on any card. 
  1. Don’t open a lot of new accounts all at once.  We understand you’re excited when you go to contract but steer clear of racking up credit card bills during the purchasing period– you can wait to buy that new dining table or sofa AFTER you’ve settled on your place!! Also, don’t close more accounts than necessary because this will lower your ratio of debt to available credit and that can hurt you.  
  1. Rotate the use all of your credit cards.  Dormant credit will not help your score.   

A good credit score will serve you well in many areas of your life, not just when it comes to buying a new home.  Work with a good lender, like Redwood Mortgage http://www.redwood-mortgage.com/lacrosse-homes/ and we’ll help you realize your dream of homeownership.