Scoring Your Credit - How's Your FICO?
The home buying process doesn't start with getting pre-approved by a lender or with choosing a real estate agent. In reality, the home buying process starts and ends with your finances. To become a homeowner, you must consider your FICO score along with the type of loan for which you'll qualify in San Jose.
A FICO score is a collection of your years of credit history based on an instrument developed by Fair Isaac and Company. Most people usually have a score of 600, but scores range from 300 to 850. Job loss has been common in the last few years, but FICO scores aren't necessarily adjusted "on a curve." A low score is a low score and that often means you can't get a decent interest rate. Some of the factors in deciding your FICO score are:
- Types of Credit — Do you have a healthy mix of loans and credit cards?
- Payment History — Do you pay your bills on time each month?
- Credit to Debt Ratio — How much do you owe versus how much credit you have available?
- Credit Inquiries — How many times has your credit history been accessed by someone other than you?
When you pull your credit report, you'll see that you actually have three reports. Experian, Equifax and TransUnion — three of the major credit reporting agencies — use a slightly different systems to calculate your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. Because of this, you have three scores, one for each scoring model.
Lenders want to ensure that giving you a loan isn't a risk for them. Your FICO score gives lenders a view of what type of borrower you are based solely on your credit history. Because of the shift in the economy, most home buyers should have scores in the range of 740 or higher to get a satisfactory interest rate. You'll still qualify for a mortgage loan with a lower score, but the interest accumulated over time could be more than double that of an individual having a near perfect FICO score.
Improving your FICO score is the best way to ease into owning a home. Contact us and we can help you get on the right track to the home of your dreams.
There are strategies to raise your score. Improving your FICO score takes time. It can be rare to make a significant change in your number with small changes, but your score can improve in a year by monitoring your credit report and by using your credit wisely. The most important thing is to know your FICO score. You'll improve your credit score by using these tips:
- Ensure that your credit history is correct. If you discover mistakes on your credit report, write to the bureau asking that the item be removed. If you have a common name or the same name as a family member, you'll want to give extra care to make sure the activity reported is correct.
- Spread your debt around. At first, this doesn't sound like a good idea. But, you steer clear of having one card that is holding the maximum and have the rest of your cards at a zero balance. It's better to have each of your cards at about less than 40% of their credit limit than to have the majority of your debt transferred to a single card.
- Apply for gas cards or store credit. For those who have no credit or below average credit, chain store credit cards and gas credit cards are ways to begin your credit history, increase your spending limits and stay on top of your payments, which will raise your FICO score. You must always avoid maintaining a large balance for too long because these types of cards normally have a surprisingly high interest rate.
- Use your credit. Whether you have older cards, or are just getting started with credit, be sure to use your cards to make sure your accounts maintain an active status. But, be sure to pay them off in no more than two or three payments.
- Stay on top of payments. Payment history is a huge factor in your FICO score. It's one of the reasons people who have recently been unemployed see the biggest hit in their credit score. Yes, it takes longer to build up your credit with payment history, but it's the most reliable way to prove that you're able to make payments to a lender.
Now that you're more informed about credit reporting, you'll be able to successfully take the first steps to homeownership, and that is improving your FICO score. Remember that when it's time to apply for a loan to purchase a home, you'll want to keep your credit inquiries within a two-week window to avoid a negative mark on your credit score. With the help of Morgan Real Estate & Financial, Inc., shopping for a mortgage can be a stress-free experience so you, too, can achieve home ownership.
Learn more about FICO scores at myFICO.com, Fair Isaac's informational site and you can review all of your credit reports for free each year at annualcreditreport.com. And, for a small payment, you can get your FICO score from each bureau on their websites: equifax.com, experian.com and transunion.com.