Credit Scores 101
A good credit score indicates a solid credit history, which is imperative when getting a loan. Improve your credit, clean up those credit reports and make yourself look like the perfect candidate for taking on a mortgage. A respectable credit rating is something anyone can achieve if exerting the right amount of time, effort and diligence ensuring each credit report is accurate and up-to-date.
Talking credit is venturing into uncharted waters for some future homebuyers but for those wanting to get ahead of the game, learning a little about credit can yield tangible results. A credit report summarizes a person's credit history. It contains details like name, address, social security number, bank statements, public filings (court judgments and liens), types of credit used (student loans, mortgage and credit cards), when credit lines were opened, if bills have been paid by due dates, how many new sources of credit were applied for and how much credit is used. A credit score is an assigned number based on actual credit reports telling lenders how much of a financial risk someone is. A credit score typically ranges from 300-900 and is reported by the Fair Isaac Corporation, generating a FICO score.
When getting a loan to buy a home, one or all of your three credit reports are pulled along with your FICO score. Borrowers with a score of 720 or higher tend to get the best interest rates. Homebuyers scoring 660 to 719 still have options, just not as many as those with higher credit scores. A score of 620 to 659 cuts buyers off from many types of loan programs and a score of 619 or below shows the highest likelihood of defaulting on a loan. Borrowers in this final category may still qualify for some mortgages but premium interest charges will usually apply and these can add up to large chunks of change
In order to know what credit history you're dealing with, you must first get a credit report. There are actually three credit reporting agencies- Equifax, Experian and TransUnion. The Fair Credit Reporting Act (FCRA) stipulates each of these companies must provide individuals with a free credit report once every 12 months. To learn about your credit this way, request a report from annualcreditreport.com or 1-877-322-8228. Do not be fooled by Web sites or ad campaigns bearing the word “free” in slogans. These impostors are likely to ask for money when this service is absolutely free. Access your credit report instantly when you choose the online option or wait two weeks for a paper copy after calling.
Once you have a current credit report in hand, don those inspector glasses and take a good, hard look. Make sure any negative information (late payments, collections and charge offs) older than seven years is removed. Unfortunately, any bad marks younger than this will have to stay on credit reports until their seven years time sentence concludes. Any bankruptcies should be gone after 10 years. Check for accounts you never opened. First, look to see if the account name, address and social security number match. If so, these false accounts could indicate identity theft, mistaken identity or just a case of simple, human error. Confirm the credit lines shown on paper match the amounts your creditors have given you. Check for dates and see that the origination dates of the accounts are all correct. Successfully getting a loan means taking a proactive approach to keeping your credit history squeaky clean.
If there's a problem or two with your credit report, don't jeopardize your financial future by putting your head in the sand. You may not even need to improve your credit: your credit history just may need some tweaking. Take care of inaccuracies by first contacting the company. Send a certified letter to the complaint department of the firm clearly explaining your case with your name and address along with documentation that helps prove your case. Ask the company to remove the credit issue in question from your report. Alert the particular credit reporting agency to any errors so they can send you information that comes from the company you contacted about the discrepancy. Keep copies of what you send along with the certified mail stub. Generally, credit reporting agencies investigate such matters within 30 days. If the error was resolved in your favor after this time period, the credit reporting firm must send a correction notice. They are also responsible for giving a free, amended credit report to those persons getting credit reports within the previous six months.
If there are blemishes on those credit reports, it is wise to repair them before seeking a large amount of credit such as a mortgage. Getting a loan means taking the steps to improve your credit. Forgo closing accounts you no longer use. If those accounts had zero balances and they are closed then the debt ratio seems higher because now a borrower has more credit used with the same amount of debt. Look your best by having several credit cards and loans with little or no balances on each one. If you have a common name, use your full legal name regarding all finance issues to limit the possibility of credit agencies confusing you with another person. Don't open new accounts unless absolutely necessary. Pay those bills on time- every time. Break the habit of using credit cards unless you can pay off monthly balances to avoid interest charges.
When it feels like the right time to buy a house, getting a loan is usually a big part of the process. Don't get left out of the loan loop because of unfit credit. Know your credit score and request those credit reports while maintaining a solid credit history. If you need to improve your credit before buying a home, start early. A good credit rating can open many doors, including one to your new home.