If you are in the market for a large purchase such as a home, it would be wise to check out your current credit scores. A good credit
score can make a huge difference in the amount of money you can borrow and the interest rate you can get from lenders. A little effort and planning can save you thousands of dollars over the life of a loan.
Just as you eat better and exercise to enjoy the benefits of a healthier physical you, your financial health is also important. One aspect of financial health is a strong
awareness of your credit standing. Your credit results are gathered and organized by 3 main credit repositories, Equifax, Experian and TransUnion. Each repository may have slightly different information and
that is why you need to review each periodically for accuracy.
Did you know that you’re eligible for one free credit report each year from each of the three nationwide credit reporting companies – Experian, Equifax, and TransUnion? If you want to check your credit – you can use a trusted
source like AnnualCreditReport.com. They are an authorized Federal Trade Commission source so you know you it’s a trusted source that won’t be charging for extra fees.
- Visit annualcreditreport.com and complete the online form
- Call 1-877-322-8228 to speak to an Annual Credit Report representative
- Mail in a request form to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
If you want a more “real time” view of your credit report, there are now some very good an reputable
sources to get this information instantly.
A very highly rated free online tool and mobile app called “Credit Karma” is very easy to use and understand. This feature rich system is totally free
to use and gives you instant access to your credit reports. Currently, Credit Karma allows you to view
your credit report from both TransUnion and Equifax with updates once a
week. They also provide you a wide range
of tools to understand why your credit score is what it is and how to improve
it. The site makes money by providing
you offers for different types of credit cards and other financial products
based on your profile. The offers are well designed in the flow of information on the website and are not distracting and overbearing like you see on some websites. Visit creditkarma.com or search for the app
in your preferred app store to use this great tool to check and manage your credit.
Another important
credit metric that many lenders will look at is your FICO score. A FICO
score is a credit score developed by FICO, a company that
specializes in what's known as “predictive analytics,” which means they take
information and analyze it to predict what's likely to happen. FICO scores are
used by 90% of the top lenders to determine your credit risk. Your FICO score
is not always the same as some credit scores you may see advertised, because there
are different credit scoring systems. Be aware of the different credit
reporting websites and make sure they say FICO to ensure you know your true FICO
score.
If you want to check your FICO score, Discover provides a
free online tool to view your credit score card and FICO score from Experian. This adds information on the third credit bureau
that is not available using Credit Karma (TransUnion and Equifax), so between
the two services you can get a free look at your scores from all three major
credit bureaus. To check your score for
free with Discover visit https://www.discover.com/free-credit-score/.
There are also many
good tools out there that you can pay a monthly fee to get your credit report and FICO information from. Be sure to make sure you look at reviews for the service you are considering to make sure you are getting
your money’s worth. MyFICO.com for example, charges about $30/month to provide you with access to all three credit bureau FICO scores and credit reports in
one place. Vistit http://www.myfico.com to
learn more. Each of the three main credit bureaus also have online tools for managing your credit report through their respective websites.
Whichever tool you
decide to use to check and monitor your credit, when you review your credit
report, be sure it is accurate. Look for inaccurate areas like name,
addresses, employers, open and closed credit, and credit that you do not
recognize. If you do find inaccuracies, there is a dispute process that
will help you investigate and correct it. Please know that fixing an
error with one repository does not correct the error with the other two.
For more information on specific question here is a link to a good governmental resource on Consumer Credit Questions from the Consumer Financial Protection Bureau.
You probably know that your credit score is something that
all mortgage companies will look at when you apply for a loan. But, how does
your credit score and credit checking actually affect buying a home? Here are a
few of the basic things to know before your apply for a mortgage.
Lenders will request access to your credit score because
it’s an indication of how well you’ll pay back a loan. It tracks all sorts of
factors related to your history of paying back credit cards and debt.
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300 - 640 = Bad credit
You might have a credit score of 630 or less if you’ve had
issues with bankruptcy, a history of missed payments or if you don’t have any
credit history.
640 – 680 = Fair credit
This is an average credit score. It tells the lender that
you do not have too much bad debt. You might want to consider paying down
credit cards and/or ensure you’re always paying your debts on time.
680- 720 = Good credit
You will be an ideal candidate for most loans and shouldn’t
worry about being penalized for your credit score.
720 – 850 = Excellent credit
You will get the best rates available as a
reward for paying down your debts on time and not having any history of issues.
There are two types of inquiries – soft and hard. Hard
inquires are the only type that affect your credit score.
When you apply for credit, a lender or credit card company
checks your credit score when making a lending decision, which is considered a
hard inquiry. A hard inquiry will typically lower your credit score by a few
points and will stay on your credit report for two years. Fortunately, as time passes, the damage to
your credit score usually decreases or disappears, often even before the hard
inquiry falls off your credit report.
A soft credit inquiry is credit check that occurs
when a person or company looks at your credit report as a
background check, like when a mortgage lender preapproves you for a
loan. Soft inquiries won't affect your credit in any way.
Most mortgage companies will look at your credit as a way to
determine your interest rate and the types of products available to you. The
better your score the lower the interest rate and the more product options you
will have. Knowing your credit score and ensuring there aren’t any outstanding
issues associated with it, could end up saving you thousands when applying for
a mortgage.
There
are many factors that can impact your credit score but they generally break
down into the following main categories with varying degrees of impact to your
score as follows.
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- Payment History – 35%
- Make sure you pay your credit card bills on time. Each time you are late with a payment your lender can and often will ding your credit report.
Even small mistakes here and there can be a major drain on your credit score as this is the most important category of
all. The good news is you can turn things around with 3-4 months of on time payments across the board.
Consider automatic payments through your online banking or lender to make sure you don’t miss anything.
- Debt Usage – 30%
- One of the main factors here is your overall debt to credit limit ration.If you are using more than 20% of your total
available credit limit each month your score will suffer. Try to keep the usage of your overall limit
under 20% to improve your score for this area. Outstanding credit card debt is
also particularly painful to your credit score. One of the best ways to maximize this part of your score is to utilize 10-20%
of your credit card limit each month and pay it off in full each billing cycle. Not only will you not suffer credit card interest charges, your credit score will improve as well.
- Credit Age – 15%
- There is not a lot you can do to impact this category in the short run. This
factor looks at how long you have had a calculable credit score and the average
age of your credit accounts. While opening up new accounts is necessary and beneficial in the long run, if you are
trying to optimize your score in the short term avoid opening new accounts
because it will bring down your average credit age score and could negatively
impact your score in the short term.
- Types of Credit – 10%
- Your account mix rewards you for having a high number of various types of credit accounts including revolving credit accounts, mortgage loans, automobile
loans, and student loans. One way to improve this score over the long term is to have multiple credit card accounts, just be sure to follow the usage guidelines
and keep the balances low and pay them off each month if possible.
- New Credit – 10%
- This aspect of your score has to do with the amount of credit inquires you are
receiving.You can hurt your score by applying to several personal loans or credit cards at the same time. Having a new inquiry won’t destroy your score
in this area but you should always be careful how many credit requests you are allowing lenders to make. Your grade in
this area will look at the total number of inquiries being made in different time intervals. Again, if you are
looking for a short term optimization of you credit score, avoid any unnecessary credit inquiries.
Ensure you make every payment on time. Set reminders or better yet, setup automatic
payments to make sure you are never late.
This is one of the largest criteria’s to you score and one you have
total control over.- Remove high interest credit card debt as soon
as possible. Good debts like mortgage
and auto loans should be paid on a regular installment but credit cards should
be kept under 10-20% of your credit limit if possible. Paying these debts down will do wonders for
your score.
- Ask for credit limit increases to help lower
your overall spending percentages. The
higher your limit, the lower your typical monthly spending percentage will be
on your report which can help improve your score.
- Leave good debts on your report.Some people try to remove old debts from
their report as soon as they pay them off, but good debts show that you have history
of paying off loans and can only help your score.
- Check your report regularly and remove any
errors or fraud. If you see something on
your report that doesn’t look right, take the time to investigate it and
dispute any incorrect information that may be harming your score.
Building
a great credit score takes time and patients but is worth it in the end. Good credit is a gateway to better interest
rates and lower cost of purchasing everything from a home to a car to many things
you need and want in life. When used responsibly, credit can actually save you
money and provide significant rewards for purchasing things you need to buy
like gas, groceries, and clothing.
Following the rules outlined in this guide should give you a good
start towards building a great credit score.