With home prices rising and mortgage rates rising, it is more important than ever to manage your credit score. The better your credit score is the better interest rate you will qualify for. A better interest rate equals more house for your monthly payment. The problem is most people don’t understand their credit score or how to make it better.
Let’s start with FICO. Your FICO score is your credit score. FICO is a publicly traded company that provides lenders with analytics and decision making services like credit scoring. They are what Band Aid is to bandages and Q-tips are to cotton swabs in the credit scoring industry.
FICO takes all of the credit data on a consumer that is provided by one of the three credit reporting companies (Transunion, Experion or Equifax) and runs it through statistical models to come up with a score. A score of over 720 is usually considered very good, 680 to 719 is considered a good score, 620 to 679 makes lenders look twice at you, 585 to 619 will usually prohibit you from a good rate, and under 585 may disqualify you for a loan all together. It is important to note that all three credit reporting companies gather different data, so your FICO score may be different depending on which credit reporting company’s data is used. This means that different banks and lenders may have a higher or lower FICO score for you based on which credit reporting company supplies their data. So if you have a borderline credit score, it may pay to shop around to find a lender that has a higher FICO score for you.
When you begin your search for your new home and the mortgage lender that is going to help you buy it, start by getting a copy of your credit report from all three credit reporting companies, Transunion, Experion, and Equifax. You are allowed to get one free credit report from each agency each year. You can get them at www.freecreditreport.com . You should use the knowledge gathered from those reports to qualify for the best mortgage rate available to you.
Some of the things your credit score will not consider are your salary, employment history, current employer, rental history, child support or other obligations. They will consider your payment history, your debt-to-credit ratio, recently opened lines of credit and prior foreclosures. It is important to note that the statistical analysis used is subject to government regulation and prohibits models that consider race, religion, marital status, national origin or sex.
So what do you do to improve your credit score?
Pay down your current debt (gives you a better credit-to-debt ratio).
Pay all your bills on time (gives you a better payment history.
Do not close unused account (give you better credit-to-debt ratio).
Do not open any new credit lines (raises red flags).
Do these things and your FICO score will improve. Then you can use your new credit score to qualify for the lowest mortgage rate available. Happy house hunting.
Rick is a Windham resident, a real estate author, and realtor. You can reach Rick with any of your real estate questions or needs at columnist@TheWindhamEagle.com.