Determining Your Credit Score
Home buyers who are seeking a
mortgage find out early-on that their credit score plays an important part in
the home buying process and in determining the interest rate that a lender
offers. A credit score is a number
that lenders use to estimate risk. Experience has shown them that borrowers with
higher credit scores are less likely to default on a loan.
All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The software used to calculate a great number of credit scores was created by Fair Isaac Corporation--FICO. Your score is determined by a number of factors, such as how long you've had credit, if you pay your bills on time and how much you owe on how many accounts. FICO scores range from 300 to 800. The higher your score, the better your credit.
Before lending you money, creditors want to determine how much of a risk you are—in other words, how likely you are to repay the money they loan you. Fixing your credit score takes time. Most increases to your credit scores take place over time and require an ongoing effort from you. The only true credit score quick-fixes are to pay down debt and to successfully dispute negative information on a credit report.
You can improve your credit scores by taking a close look at your credit reports and charting a plan of action to improve them. Improve your payment history by always paying your bill on time. Late payments play a major role in driving down your score. You need to keep your debt to a minimum. Keep your credit card balances low. High debt-to-credit-limit ratios drive your scores down. Pay off debt, don't move it around. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved. Don't close unused accounts, because zero balance might help your score. Your credit needs to be managed wisely. Do try to open a few new accounts if you've had credit problems in the past. Pay them on time and don't max out your credit limits. The types of credit you use can also affect your credit score. A mixture of credit cards and installment loans, loans with fixed payments, can help raise your score if you manage the credit cards responsibly. But, having many installment loans can lower your scores because payments remain the same until balances are paid in full. Closing an account doesn't remove it from your report. It may still be considered for scoring purposes.
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