The Impact of Your Credit

Everyone knows the importance of having a favorable rate on their mortgage. One of the most important factors in obtaining that favorable rate is your credit score. We will review what your credit score means, how it is determined, and how to improve it.

Image via Flickr by Dave Dugdale

 

What Your Credit Score Means

Your credit score is a standardized way for lenders to determine how risky it is to lend you money. The theory is that the better score someone has, the less risk they are. Because of this, the lower the risk, the lower your interest rate is. Therefore, in order to get the best rate on your mortgage, you will want to have the best credit score possible.

Most lenders use a standard “grading” system to categorize credit scores. While some lenders may develop their own systems for classification of scores, here is a general guide to score categorization:

Credit Score Grade

800 – 850………. A+

750 – 799………. A

700 – 749………. A-

650 – 699………. B

600 – 649………. C

550 – 599………. D

500 – 549………. E

300 – 499………. F

How Your Credit Score is Determined

Your credit score is formally known as a Fair Issac Corporation Score (commonly called the FICO® score). It ranges from 300 – 850 and is calculated according to the following risk factors:

Payment History (35% of score)

  • Payment information on several types of accounts

  • Public record and collection items

  • Details on late or missed payments such as:

    • How late they were

    • How much was owed

    • How recently they occurred

    • How many there are

Amounts Owed (30% of score)

  • Amount owed on all accounts

  • Amount owed on different types of accounts

  • Whether you are showing a balance on certain types of accounts

  • How much of the total credit line is being used

  • How much of installment loan accounts is still owed

Length of Credit History (15% of score)

  • How long your credit accounts have been established

  • How long specific credit accounts have been established

  • How long it has been since you used certain accounts

  • New Credit & Inquiries (10% of score)

How many new accounts you have

  • How long it has been since you opened a new account

  • How many recent requests for credit you have

Types of Credit (10% of score)

  • What kinds of credit accounts you have and how many of each

  • Total number of accounts you have

How You Can Improve Your Credit Score

If your credit score is keeping you from obtaining a better mortgage rate, there are a few things you can do to clean up your credit history.

First, you’ll want to obtain a complete copy of your credit report from the three leading reporting agencies:

 

Next, report your credit report line-by-line. Specifically, you’ll want to search for errors, omissions, duplications and “common name” errors.

  • If you come across any errors, write out exactly what should be corrected and why. You are able to add 100 words or less to reports on questioned items.

  • You can also find assistance through credit counselors, who are available through the various credit bureaus.

Federal law requires credit bureaus to contact all creditors on items where mistakes were made. According to the Fair Credit Reporting Act of 1971, if these firms fail to respond to you in writing within 30 days, they are obligated to remove the disputed items from your records.

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