Demystifying your Credit Score

How to Get Your Credit Score Up — Week 2: Demystifying your Credit Score

A high credit score is always important, whether you buy a home anytime soon or not. Your FICO score and credit report are vital to getting any loan. This series will give you the financial strategies you need to get your credit score as high as possible.

One number — your credit score — could make or break your opportunity to get all sorts of loans. 

A great, and even good, credit score can save you thousands, maybe even tens of thousands, of dollars on your mortgage when you buy or refinance, for example!

The better your score, the more willing lenders will be to offer you a lower interest rate and more loan options you’ll have to choose from.

It’s never too late to begin practicing good credit habits. Remember that your credit score is just one part of your financial picture that a lender will use to determine your ability to repay your mortgage. However, it’s one of the most significant factors that determine the interest rate you receive.

What Exactly Is a Credit Score

Don’t confuse your credit score with your credit report. Your credit score is like a grade given to your credit report. FICO provides a three-digit number ranging from 300 to 850 after analyzing the data and information on your credit report.

Lenders will get a credit score from each of the three major credit bureaus (Experian, Equifax, and TransUnion) based on the information (i.e., credit report) they keep on file about you. Each score can be different.

Most lenders use the FICO score for credit decisions even though other companies like VantageScore pull data to provide credit scores. Remember that your credit score can even determine the interest rate you will pay for credit cards and car loans, not only mortgages.

Your credit score helps lenders predict your potential credit success or failure. Your score tells lenders how you’ve handled your credit card and other loan payments, like your car or student loan.

Remember that your credit score is not based on your income, length of employment, or assets but on your creditworthiness. So a higher income doesn’t necessarily mean a higher credit score. It’s how you have managed credit.

On the other hand, your credit report isn’t a “score” but a compilation of your financial history, including all of your debts and payment history. Its information helps FICO and other companies calculate your credit score.

Your report includes the type of accounts you have, the amounts, and the age of your accounts. However, as of July 1, 2017, new rules now exclude most civil debts and tax liens from reports.

Keep reading to learn more about demystifying your credit score.

Know Your Score

Not knowing your credit score could lead to an unpleasant surprise when you apply for a loan. As your score lowers, you’ll be offered higher interest rates and fewer loan options … not something you want to happen!

That’s why you should start to monitor your credit score from all three bureaus about 3-6 months BEFORE you even start looking for a home. The earlier you start, the more time you can repair any credit issues, if there are any.

It’s easier now than ever to track your credit score. You can sign up online for myfico.com or other credit monitoring companies. [LINK]

You will get email or text alerts from myfico.com if there are any changes to your credit reports. It’s a great way to get an overview of your credit report and determine which factors affect a low score.

You’re also entitled to one free copy of your credit report from each credit bureau every 12 months. You can get it through AnnualCreditReport.com. [LINK] Most experts say to stagger these reports so that you get one every 4 months.

Your report includes all the credit activity that will be used to determine your credit score. Remember that each bureau’s report could vary based on how they compile your information.

Always check for errors in your report. An error could negatively affect your credit score and your mortgage rate.

A good score is considered 720 or above, and that’s when lenders will offer you their best rates and products. A score of 680 is still regarded as good, but your interest rate will be considerably higher.

When you start getting below 660, some lenders may deny your loan application entirely, or you’ll have access to only one or two loan options that may be available.

Some FHA loans will accept a score as low as 580, but most banks require a higher score.

Here’s a general breakdown of the FICO scores:

579 and lower: poor

580 – 669: fair

670 – 739: good

740 – 799: very good

800+ : excellent

How to Improve Your Score

No matter your score, it’s good to use the strategies below. That way, you can either improve or keep it in a good or great range to qualify for a lower interest rate and better loan products.

It takes work, but your score will increase if you make a consistent plan. Then you’ll be all set to meet with a lender!

Don’t close credit cards that have a positive payment history.

It’s good if you’ve had a credit card for a long time since the length of your credit history totals around 15% of your score. Go back to our first article, Why Having a Credit Card Helps Your Credit, [LINK] for a review.

Pay your credit cards on time since your payment history accounts for 35% of your score.

One late payment can affect your score for a year; many late payments for a few years. 

Make sure you set up a system of paying your bills that works for you. Don’t misplace bills or notices. Credit card companies usually wait to report your late payment to credit bureaus until about 30 days have passed the due date or once you’ve missed two due dates. If you miss a payment, call your credit card company immediately since they may agree to withhold reporting it if you have been a good customer.

Pay more than the minimum on your cards to keep balances low. 

The higher your credit card balances, the lower your score. Lenders care about how much you owe on your most recent statement. Make it a habit to keep expenses down and pay back your balances in full if you can.

Don’t max out your cards and use your entire line of credit! 

Keep balances below 10% or 20% of the total credit line so that your ratio of debt-to-available-credit is good. Remember that 30% of your credit score is determined by how much you owe on each account and how much of your credit limit has been used. 

Say yes if your account offers more available credit, but don’t use it.

Remember, higher available credit and lower balances mean a better debt-to-available-credit ratio. 

Cut back on your credit card use for two or three months before your plan to apply for a loan or mortgage. 

This will help you get those balances lower and improve your debt-to-available-credit ratio. Please keep it simple so you only have a few cards to deal with regularly. 

You want “older” cards in your wallet to show dependability. 

How long you have owned your cards highlights the length of your payment history and influences the average account age on your credit report. The longer you’ve owned, it means you’re a dependable and stable borrower.

Don’t open new credit cards or apply for other loans if you plan to apply for a mortgage in the next few months. 

Your score can be negatively affected whenever a business checks your credit report for a loan application. Don’t buy a car or start purchasing large items during this time! New accounts and queries account for 10% of your score.

However, YOU can still check your credit report as often as you like, which won’t affect your credit score. Shopping around for a mortgage (or car loan) won’t lower your score as long as inquiries into your credit report are made within 30 to 45 days of each other. This way, it will be counted as a “single request.”

Pay off your parking/speeding tickets and even library fines. 

You don’t want these “trivial” fines to be turned over to a collections agency. These little slip-ups could do damage to your score.

Don’t seek consumer credit counseling to improve your score since that information is on your credit report. 

It may not lower your score, but lenders don’t always consider counseling positive. They may see someone who has mismanaged their finances.

However, you may look for counseling before considering buying a home, especially if you need help to get your finances and debt on the right track.

Don’t ever feel like you can’t improve your score. 

Negative information on your credit report can be erased over time. It can take some work, but you can improve your credit score once you implement these strategies.

Start Today!

It’s best to start monitoring your credit score and credit report all the time, especially to know if anyone is using your credit for themselves. 

Next week, 3 Common Mistakes That Lower Credit Scores will provide even more strategies to get your score where you want it to be. I hope you enjoy this series, How to Build Credit and Other Financial Strategies for Buyers.