Home Buying Guide|
Your Credit Score...
Your credit is your most valuable asset when it comes to buying a home.
When applying for a mortgage, lenders use what is called your FICO score in determining credit worthiness,
or the likelihood that an individual will pay their bills. FICO is a score that was developed by
Fair Issac Company, a California-based company that specializes in the construction of statistical scoring models.
Your FICO score can range from 300-850, with 843 being the "real life" high score,
as nobody can be perfect. In the US we have three major credit repositories, or bureaus;
Trans Union, Equifax, & Experian. Each bureau calls it's FICO score something different
(Trans Union-Empirica, Equifax-Beacon, Experian-Fair Issac), but all use a similar format
in calculating an individual's score. The FICO model is dynamic, meaning that it assigns
different values to each line item depending on other factors in the credit file.
As a consumer, you are entitled to one free credit report within a 12-month period from each of the three credit
bureaus, but this does not include a free credit score.
» Get a FREE Credit Analysis - click here! «
The above chart demonstrates how your FICO score is calculated. The 5 categories used to calculate a FICO score are:
- Payment history (the most important). A regular trade line that is past due causes more negative scoring impact than any other type of activity. Collections and judgments can also have a significant effect on your score. When it comes to collections, its not always best to pay them off. You never want to pay off a collection that has a "last active date" of more than a year old. Old bad credit is better than new, less bad credit. By paying off an old collection it updates the date of last activity and could bring your score down. Instead try to negotiate for the deletion of the account all together, as a deletion can increase your score significantly. Bottom lines is make sure to make timely payments, and you can help ensure you will keep a higher FICO score.
- Amounts owed (2nd most important). The key to keeping your score up is keeping your balances down. It is always best to pay off debt rather than moving it around, and getting your balances below 50% of your limit is always your best bet. Going over 80% of your limit is very bad and can bring down your score significantly, even if there are no negative items on your report. Your score is factored on your available credit on each line, as well as totaled, so it's best to keep this philosophy on all revolving accounts.
- Length of credit history also has a substantial effect on your FICO score. The newer your credit, the lower your score will be. Actively using the credit accounts you have is also very important (2-4 active credit accounts is optimal). Your scoring model is built on your dates of last activity, so if your not using your cards or carrying a balance on them, they will stop having a positive effect on your score, and can in turn bring it down. Just remember not to exceed 50% of your available credit limit.
- New credit can also have an effect on your FICO, and accounts for about 10% of your score. You never want to open a number of new credit cards that you don't need, instead look to increase the available credit that you already have. This will help on two ends, as you're not opening new accounts (which brings down your score), and you're keeping your balance to limit ratio's in line, which makes up a big part of your score.
- Lastly is your types of credit used.
In general, having credit cards and installment loans,
and paying them on time, will raise your score.
Someone with no credit cards, for example, tends to be higher risk than someone who
has managed credit cards responsibly. It is good to have credit cards,
but you must manage them responsibility. Don't open accounts just to have a better credit mix,
as it probably won't raise your score, and only apply for an open new credit accounts only as needed.
It is better to ask your creditors to increase your available credit on your existing accounts,
than to open new ones. It is best to have 2 or 3 Bank credit cards, as bank cards have
the best impact on the scoring model, and having both revolving and
installment accounts on your report will help you. Also note that closing an
account doesn't make it go away. A closed account will still show up on your credit report,
and my be considered by the score. FICO carries a 2 year look back period, so the bad credit will carry on for 2 years.
The Truth About Credit Inquiries...
There are several myths when it comes to credit inquiries and it's good to know what hurts and what doesn't.
- Inquiries account for 10% or less of the total weighting
- Scoring ignores all mortgage and auto inquiries in the last 30 days. Thereafter; multiple mortgage or auto inquiries in any 14 days period score as just one. The bureaus understand that you are going to shop for the best mortgage or auto rates and take that into account, whereas if you apply for a credit card, you are not shopping but rather looking for credit which will hurt.
- Checking your own credit report, requests used for pre-screening, inquiries made by businesses with which you already have a credit account, and inquiries for employment do not count toward your FICO score.
Get an Expert to Help You Figure it Out...
There really isn't any substitute for having a mortgage professional that is an expert help you decifer your credit report. They can
offer suggestions based on their experience that might be able to help you raise your score. Remember, each situation is
different so it needs to be looked at on an individual basis.
If you are thinking about buying a home in the Metro Detroit Michigan area and would like a
mortgage professional to contact you, click here and you'll recieve a FREE Credit Analysis.
|It is a GREAT time to buy a home so take advantage of today's low home prices and low home loan interest rates.
The cost to you to receive expert buyer representation provided by Steve Hatfield is ZERO $$!
That's right...FREE Buyer Representation!!
Put Steve Hatfield's 23 years of experience to work for you... Contact Steve now!
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