One of the most important factors in determining your lending risk and therefore your mortgage rate is your credit score. A credit score is a number that helps lenders predict how likely you are to make your mortgage payments on time. Having a high “FICO” credit score allows homeowners to qualify for the best mortgage rates and programs. Having a lower “FICO” score means the mortgage lender will need to charge a higher interest rate and/or you will be unable to qualify for certain mortgage loans. Having a low “FICO” score will disqualify you from some or all of the available mortgage loans. So, having the information before hand to make the correct credit decisions will save you tens of thousands of dollars in mortgage interest down the road.
Understanding how your credit score is calculated is the key to building a high score and keeping it there. It takes years to build your credit, but it can be severely damaged with just 1 or 2 poor financial decisions, so knowing how to build and maintain that high score is important.
“FICO” is short for the actual name of a company – Fair Isaac Corporation – that uses advanced math and analytics in combination with data from the 3 major credit bureaus – Experian, Equifax, & Transunion. Combining this data reported by the bureaus gives each person 3 different FICO scores. These scores are based on:
Each of the 3 major credit bureaus will give you a score ranging from 300-850. Your mortgage lender will use the middle score in determining what mortgage loan and program you potentially qualify for.
800+ = Excellent
740-800 = Very Good
700-740 = Good
640-700 = Fair
600-640 = Low
Below 600 = “Unlendable” for most Mortgages
What is NOT Considered When Calculating your Score:
- Race, color, religion, national origin, sex, marital status, age
- Your salary, occupation, title, employer, date employed, or employment history
- Where you live or have lived
- Any information not found on your credit report – child support, rental agreements, interest rates on other loans and credit cards
You are allowed to get 1 credit report from each of the 3 major credit bureaus once every 12 months. This will give you a detailed report so you can check for accuracy, but will NOT give you an actual FICO score.
How to Establish Credit
All people are created equal in the eyes of the credit bureaus and credit scorers. We all start with the same credit score – ZERO. What separates us is just the know how to build that ZERO into strong score that gives us the maximum borrowing power at the lowest interest rate possible. Lenders and credit card companies understand that you just don’t start with a 820 score it has to be built up. This section will help you build a score quickly and effectively.
Tips To Help You Establish Credit
- Open a checking & savings account - This will begin to give you credibility with lenders
- Put bills in your name - Establish a non-credit report history with liabilities such as an apartment, utilities, and cell phones
- Co-Signer - Ask someone with established credit to put you as a co-signer on a low limit credit card to help you establish a score
- Get a secure credit card - You don’t need a credit score to get one of these. You deposit money in advance with the credit card company and pay the bill every month. It reports to the credit bureaus like an ordinary credit card.
- Get a retail store card - Retail store cards and gas cards are traditionally a bit easier to qualify for than other credit cards. 1 or 2 will do. Having too many cards is almost as bad as not having enough.
- Talk with your local bank or credit union - The local bank you have your accounts with may offer you a low limit credit card or small personal loan to help you establish credit and build trust with that institution.
Tips To Help You Repair Damaged or Bruised Credit.
If you have hit a rough patch and had some credit issues, your score can rebound with some work.
- Get current & stay current on credit obligations moving forward
- Try to reduce your over all debt load
- Pay off any old unpaid debt – collections, repossessions, etc.
- Pay down credit card debt below 50% of the available balance so they are not “maxed out”
- Keep older credit lines open, but paid down
Tips To Help You Correct Inaccurate Credit Information.
If you have found an error on your report you need to know your rights under the Fair Credit Reporting Act (FCRA) and how to fix these errors. The credit bureaus are powerful, but the FCRA will give you the legal sword to dispute these errors either over the phone, by mail or online.
- You Have the Right to Have your Dispute Investigated: It’s called “the 30 day rule”. The bureaus must investigate your dispute by reaching out to the collection company or creditor in question. The creditor is then required by law to launch it’s own investigation into the claim. If a claim is deemed to be “frivolous” it will not be investigated, so make sure you have provided the bureau with all the accurate documentation supporting the error.
- You Have the Right to Have Errors Corrected: If an error has been proven, the creditor must then report the accurate information to all 3 credit bureaus to make sure it’s corrected. If the creditor later finds information that proves otherwise, the previous correction can be over turned.
- You Have the Right to a Written Response: The bureaus have to give you a written report of the investigation. Make sure to keep this report for your records so if the error comes up again you will have the proof readily available.
- The Right to Have a Report Included with your File: If for whatever reason the result of the investigation isn’t in your favor, you are entitled to have a 100 word explanation included on your credit report to your side of the claim.
- The Legal Right to Sue: If after you have exhausted all of your legal rights under the FCRA and the creditor or collection company continues to smear your good name by keep the inaccurate trade line on your report, you have the right to sue them in court.
- Disputing All Bureaus With Inaccurate Information. Keep in mind, you must dispute any errors with each individual credit bureau – Experian, Equifax, Trans Union – that is reporting incorrect information. Disputing with 1 company will not fix the other 2 as they are wholly independent.
Remember, having a high credit score means you have made responsible financial decisions and you will be rewarded with a lower interest rate when it’s time to get approved for a mortgage. Conversely, having a lower credit score may mean you can not qualify for the mortgage loan or rate you wish.