Understanding Your Score
In your quest to get a new home loan or refinance your mortgage, one of the very first factors that need to be addressed is your FICO score.
Experian, TransUnion, and Equifax are three major credit reporting agencies that record your score, and each has a proprietary formula for building your score. FICO is an acronym for Fair Isaac and Co, the company that originally developed the score.
Currently, Experian still calls the score FICO, while TransUnion refers to your score as “Beacon,” and Equifax uses “Empirica.” Each agency uses a unique model to determine your score; however, roughly the same criteria is used to determine how your score is calculated. Below are the four main rules that make up your score.
CREDIT HISTORY – This is how long you have had a credit history.
LATE PAYMENTS – Late payments are defined as installment payments that are over 30 days late.
YOUR DEBT BALANCES – Is the amount of debt you currently owe to your creditors.
CREDIT INQUIRIES – Is the number of times and frequency that your credit score has been pulled to get credit.
The four factors above all play a role in determining your score. For each agency, the weight of each factor varies and may cause a slight variation in your score. To obtain credit, many lenders may use just one agency or a weighted average of two or more credit agency scores.
FICO scores range from 300 to 800, with 800 being the best. The higher your score, the better. And for a mortgage aim for at least a score of 620 or above.
“Your credit score makes a huge difference in determining what interest rate you will receive on your next home loan or mortgage. A higher score puts you in the best position to receive the most optimal rate.”
How to Improve Your Score
Improving your score is a great place to start. The goal is to position yourself so you can get the best rate possible. Like mortgage loans, a quick internet search will give you a multitude of sources and sites and businesses that promise to increase your score in a short period.
Raising your credit score is not easy, and a rapid increase in your credit score is not likely. However, there are some immediate steps you can take to start steadily increasing your scores.
Get Your Scores
The first thing to do is to find out where you stand with each of the three agencies. You can make your request directly through their websites.
We have also learned that organizations such as AAA and many of your credit card companies offer free or paid subscriptions to monitor your credit score. Check with them to see if they provide a service to obtain a copy of your report.
Examine your Credit Profile
Once you have obtained your report, it is time to review the information on the report to assure that it is accurate and there are no discrepancies.
This portion of the report will report your name and names you have used, current and previous addresses, and phone numbers. It also includes your social security number (a portion may be blacked out for your security and protection), birth date, and previous employers.
Public records could include but not limited to civil judgments, state or federal tax owed, and child support. If you have public records, make sure they have been satisfied. Or make arrangements to pay them back, settle or dispute them right away.
These are accounts that can be potentially negative on your report. Typically these are accounts that have defaulted or have been sent to collections.
Accounts in Good Standing
These are accounts where you have a current outstanding balance and are making payments consistently. This includes credit cards, personal loans, auto loans, student loans, and installment loans.
Historical Account Information
This table will give you a detailed total of all of your accounts and includes total balance, total scheduled monthly payment amounts, actual payment amounts, and date of last payment. Depending on the credit agency, some information may not be included in the summary.
Credit History Requests/Inquiries
The credit history section is a recording of different companies that have pulled your credit for the purposes of employment, renting a house or apartment, or obtaining credit.
There are two types of inquiries; soft inquiries and hard inquiries. A soft inquiry is when a potential creditor looks at your report to see if they want to send you a promotion. A hard inquiry is a report that you initiate and give permission to a creditor to review your score. A hard inquiry will result in a temporary dip in your score, so use discretion when authorizing a potential creditor to pull your score.
Once you have gone over the report, make sure there are no discrepancies. Common discrepancies are late payments when the account was paid on time. An uncommon error is physical addresses that you are not familiar with.