Optimizing Your Credit Score

 Photo by  rawpixel  on  Unsplash

Photo by rawpixel on Unsplash


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by Phillip B. Burum, Executive Vice President, Diversified Pacific,

President, Building Industry Association (BIA) Baldy View Chapter

    

Today is the day that you finally decided that it’s time to start down the path towards buying a home. Whether it is your first home or your fifth home, the path forward needs to start by checking and gaining an understanding of your credit score.

     Lenders use a variety of scoring models to measure creditworthiness, but the one used by most lenders is the FICO or FICO Classic score, created by the Fair Isaac Corporation. FICO scores range from 300 to 850 with higher numbers being better than lower scores.

     Credit scores provide potential lenders with the most important piece of information required to calculate the mortgage rate and the amount that can be borrowed.  Mortgage lenders, insurance companies and even prospective employers will use credit scores to determine whether you’re a good risk.

     A free credit report (actually called a credit file disclosure) can be obtained from www.annualcreditreport.com - the only service authorized by federal law. This site allows you to request a free credit report online, by phone or by mail once every 12 months from the three credit reporting companies. There are other services, but some of them require regular fees, charges; or are simply marketing devices to generate sales for other services or products.

     Credit reports are organized into sections detailing your personal information, a credit summary, your account information, additional inquiries (other potential creditors who also want to examine your credit history) and collections and public records. You should also receive summaries of your rights under state law and the Fair Credit Reporting Act along with information on how to dispute misinformation found in your report.

     Today’s credit scores are drawn from three nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. FICO scores are calculated based on five different categories; amount of debt, payment history, length of credit history, utilization or mix of credit used and new credit obtained or applied for. Each of the three major credit reporting agencies will use these same categories in calculating the score but the weight each carries in the overall score will vary from agency to agency. 

     Generally speaking, if your score is north of 740, keep doing what you are doing, you probably already know everything you need to know about maintaining good credit. If your average score is below 650, it probably makes sense to contact a debt or credit counselor before shopping for a home. Remember, if you are married and the two of you will appear on title to the house, both scores will be considered by lenders.  

     Many will fall into the range between 650 and 740. If your score falls in that range, there are steps that can be taken without the need to retain a credit specialist. Analyze your current financial situation. FICO scores are higher with long credit histories, timely payment, and unused credit. As a rule of thumb, carrying debt of 30 percent or less of the maximum allowable credit is a positive for your credit score, 20 percent is even better. If you have cash in the bank, consider paying down some of the higher balances on your credit cards. Avoid any major purchases that push your credit and refrain from opening new lines of credit. All of these steps will work towards improving your FICO score.

     Credit scores can change significantly within a few months. Be diligent in your quest to improve your score and contact a specialist if needed. A 20- to 40 point swing can be the difference in being qualified for a great rate or barely qualifying for a high fee, high interest loan. By way of example; an increase of 0.5 percent on the interest rate of a home with a $300,000 mortgage will cost nearly $100 more per month. A great credit score makes a difference so address the issue early and stay on top of it through your shopping and buying process.

     The Building Industry Association (BIA) Baldy View Chapter seeks to advance the opportunity to attain the American Dream of homeownership. For more information on homebuying, selling, finance or improvements; visit www.biabuild.com on the web.

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