Why It’s Important
When a lender looks at your home loan application, one of the first items they look at is your credit score. It indicates how likely you will pay bills on time. The higher your FICO® (an abbreviation for Fair Isaac Co.) credit score, the better chances of approval and the lower the interest rate and fees you’ll be offered on your home loan. If the score is too low, you will be denied. Caution, there are many companies that offer a “credit score.” These scores may be created differently, as each company creates their own version.
The three credit bureaus, Experian, Transunion and Equifax, submit regular credit scores to FICO®, which aggregates your credit behavior scores into ONE REPORT. It is estimated that nearly 90% of lenders use the FICO® report to some extent when it comes to improving credit.
What is a “Good” Credit Score?
For FICO®, the highest score is 850, and the lowest is 300. While 850 is perfect, most lenders consider anything above 740 a good score, and will likely offer the best (lowest) rates for a home loan to people with 740 or above. Rates would still be okay (not the best) for borrowers with credit scores between 700 and 739.
The difference between a 700 credit score and a 698 could mean .125% higher interest rate, which doesn’t sound like a lot, but over a 30 year loan, it can mean thousands of dollars!
How to Improve Your Credit Score
1. Pay all your bills on time, especially a mortgage loan or rent payment. Your payment history makes up 35% of your FICO score.
2. Keep balances at 10% or less of the available credit limit. This shows you are managing your credit efficiently.
3. SPECIAL TRICK (1) – Pay off as much of the balance before the statement date. The balance reported to the credit bureaus looks lower and more favorable.
4. Review your credit report at least every 6 months and dispute all errors immediately. You can dispute through Equifax, Experian, and TransUnion.
5. SPECIAL TRICK (2) – Do you have a medical collection on your report. They are not supposed to be reported, as the information is confidential. Ask the doctor, collection agency and credit bureau to remove it immediately.
6. SPECIAL TRICK (3) – Try inheriting a couple of positive credit accounts from a close relative.
7. SPECIAL TRICK (4) – Do you have a federal tax lien? There is an IRS procedure that will remove these liens from a credit report. If the federal tax lien is unpaid, yet still under $25,000, make three payments on an agreed upon payment plan and the lien can once again be removed by submitting the proper paperwork.
8. Avoid applying for credit too often, as it hurts your score. Two to three cards is enough.
9. Setup email or text payment reminders.
10. Consider enrolling in automatic payments through credit card and loan providers, which debit payments from your bank account automatically.
11. Don’t declare bankruptcy or foreclosure if at all possible. Explore all options first, as it will hurt your credit for many years.
12. Pay bills with cash, check or debit card. Try to use a small amount of credit.
13. If negative information is being reported on your report, call or send a letter to the lender to negotiate the claim. It is better to work it out sooner versus later.
14. If you do not have a credit card, apply ASAP. Handling credit cards responsibly is a good sign to lenders.
15. Become an authorized user on someone else’s card, as long as they are managing their credit well and their score is higher than yours. This looks good to lenders that you are handling the credit sensibly.
16. Raise your credit limit — Ask for the limit to be raised if you don’t intend to use it, as that helps to keep your available credit at 25%, per #2 above.
17. Don’t close any credit cards — It causes your available credit to drop.
18. Mix it up – Use different kinds of credit… an appliance loan or personal loan.
For more details on the above tips, contact The Mortgage Fee Coach!!
Whom Do You Ask if Your Credit Score Doesn’t Look Right?
Since having a good score is so important, you’d better make sure it’s right! You can and are entitled to obtain a free copy from a credit bureau every 12 months by federal law from AnnualCreditReport.com. What I do is request a report from a different bureau every 6 months. If you are not able to correct disputes directly with the creditor or lender, you can report the issue to The Consumer Financial Protection Bureau.
The Mortgage Fee Coach can help you to achieve the lowest mortgage rates and fees possible. We have saved our past clients an average of $10,000.
Call us at (949) 484-6332 OR email to dan@mortgagefeecoach.com if you have questions. The first 15 minutes is FREE.