A Skilled Mortgage Lender Can Help
It’s a very simple equation. The higher your credit score, the better interest rate you will receive as a borrower. The reasoning behind the equation is equally simple –your interest rate not only reflects current market conditions but also your estimated ability to pay back the loan. To a lender, the latter is worth its weight in gold.
Components of a Credit Score Generally speaking, your credit score is based upon the following criteria in order of importance:
Payment history (this is where delinquencies will hurt you).
Responsibility regarding credit usage (how maxed out are your accounts).
Credit age (how long have you had your credit accounts).
Number of credit inquiry requests.
Credit diversity.
These quantifiable aspects, once accumulated, typically result in a number between 450 and 850. The bottom line is the higher number, the more likely you are to pay back the loan. A Closer Look at the Players Involved. There are three separate credit bureaus that keep track of your score, Experian, Trans Union and Equifax. If you’ve heard your score referred to as a “FICO” score it’s because all three bureaus use software developed by Fair Isaac Corporation. FICO is an acronym taken from that name. It’s important to know most lenders look at all three scores when making a decision on your loan, since scores can and often do vary. While FICO is the industry standard, the three major credit bureaus recently released their own scoring model called Vantage Score. The new system is actively being marketed to lenders, and the bureaus claim that it will produce more uniform results. In addition, the scoring system is arranged similarly to the grades given out in school, making it easier for everyone to understand. Time will tell whether this system will impact the use of the FICO system. What a Credit Score Means... A borrower with an outstanding credit score will get what is called an A-paper loan. This borrower is rewarded with a lower interest rate because of their proven track record. Consumers with less-than-perfect credit receive loans labeled A-minus, B-paper, C-paper or D-paper. These loans are known as “sub-prime” and come with a higher interest rate. On a monthly basis, this translates into more money out of the borrower’s pocket."
Improving Your Score
Now that we’ve explored the nuts and bolts of credit scoring, let’s examine how you can improve your score. For starters, it’s a good idea to consult with a qualified mortgage professional that can provide examples of reasonable credit usage, discuss options for paying off existing debt and advise you regarding whether limiting or expanding your credit is most beneficial. A mortgage consultant can also assist you with identifying negative items or potential errors on your credit report. It’s important to deal with such issues as soon as possible. In addition, if you need credit counseling, a mortgage professional can help you obtain it. Here are some additional tips to keep in mind:
1)Pay your bills in a timely manner – Paying bills on time for one month can raise your credit score as much as 20 points.
2)Control the balances on your credit cards. Maxing out credit cards can lower your score as much as 70 points.
3)Don’t open new lines of credit you don’t need. New accounts lower your average account age which, in turn, may lower your score as much as 10 points.
4)Increasing high credit limit on current accounts – Often you can increase your line of credit to the point where you balance is less than 50%, this generally has a positive impact on your scores as the credit bureau’s systems pick this ratio up as a conservative use of spending.
