Tips and Process of Buying Home in Credit Score
- A credit score is simply a numerical representation of your credit worthiness. Your credit score refers to your FICO credit score, developed by Fair, Isaac & Co. to rate you as a credit risk. FICO scores generally range from 300 and 850.
For most loan programs, scores below 620 are ranked below average; between 620 and 680 are average; higher than 680 is above average. Excellent scores are in the 700's. The higher the score, the better-the higher the credit score, the better the credit risk.
When you apply for credit your score does not come directly from FICO. Instead each bureau has its own version of the rating system with its own name: Equifax is called Beacon, Trans Union is Empirica and Experian is Experian/Fair Issac. However, the calculations used to determine these scores are different for each bureau and the formula is not disclosed to the consumer.
Most lenders pull a tri-merged credit report. This provides the lender with scores from all three bureaus. In general, the middle of the 3 scores is used to determine eligibility. In a case where there are two or more borrowers, the lowest middle score is used.
- How is my score determined? Below are the approximate percentages that determine your FICO Score.
- Payment history (35%) If you have any accounts sent to collection or bankruptcies, they will have the largest impact on your score.
- Outstanding Debt (30%) High balances on credit cards, or more precisely, balances that are close to your credit limit can negatively affect your score. Keep your balances below 30%.
- Length of your credit history (15%) How long have your accounts been open? The longer, the better.
- Recent inquiries (10%) Every time you apply for credit of any kind, you create an inquiry on your credit report.
- Types of credit in use (10%) What kind of accounts do you have and how much do you owe.
Here are a few ways to establish good credit:
- If you are overextended, do your best to consolidate your debts.
- Pay off all delinquent, past due accounts, judgments, liens, etc. This will not remove the account from your credit report, but it will show you have cleared up past issues. The longer these items remain "unpaid," the longer it will take to establish good credit.
- Keep all credit you now have current. This simply means pay all of your house payments, cards, and any other credit on time!
- Get new credit! This can be achieved by getting creditors to extend you new credit opportunities. This can be difficult as most creditors require good credit; a catch 22.
- Credit Score FAQ:
1. Does every consumer have a credit score?
No. For a credit score to be calculated on your credit report, the report must contain one account that has been open for at least six months..
2. How often does the credit score change?
Your file is continually updated with new information from your creditors. Your score is calculated based on the latest information contained in your file at the time the score is requested. Thus, your score from a month ago is probably not the same score a lender would get from the credit-reporting agency today.
3. How long does it take to rebuild my score?
The length of time to rebuild your score depends on the reason for the low score. Most decreases in scores are due to the addition of new credit information to your credit report such as a delinquency or an inquiry. Negative information and Chapter 13 bankruptcies remain on file for seven years. Chapter 7, 11 and 12 bankruptcies remain on file for ten years from date filing.
4. If my spouse has bad credit could it affect my credit score?
If you hold a joint credit account, have co-signed a loan or have authorized use of another person's credit, these items could affect your score if they appear on your credit report. Remember: if there are two or more borrowers, the lowest middle score is used.
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