Credit report. Credit score. FICO score. What do all these terms mean? And how do they affect
your ability to get a home loan? In the next few minutes we will explain these
terms and how to improve your credit score as you prepare to get pre-approved for a home
loan. Let us start with the lending institutions.
These are companies that lend you money in various ways, such as credit cards, car loans,
and home mortgages. As you deal with these companies, they are reporting your transactions
to credit bureaus. The three primary credit bureaus are Equifax,
TransUnion, and Experian. They tabulate and summarize the credit data they receive from
your lenders to create credit reports. These reports are provided to other lenders who
may be considering lending money to you. You can also view the credit reports that
these three credit bureaus have generated. You can view them for free once every 12 months
by going to the AnnualCreditReport.com website. This is the site recommended by the Consumer
Financial Protection Bureau of the US Government. The AnnualCreditReport.com website will likely
transfer you to the website for each of the credit bureaus you select. These websites
have descriptions of the items on your credit report.
Note that a credit score is not included with your free credit report.
Your credit report summarizes your credit activity, but does not grade your credit worthiness.
This is where your credit score comes in. It is used as an indicator of the likelihood
you will pay back a loan. Fortunately, the three major credit bureaus
all use the same scoring system. This system is provided by the Fair Isaac Corporation,
commonly known as FICO. The credit score you get from any of the three major credit bureaus
is considered a FICO score. FICO does not generate your score. Rather,
they supply the scoring system to the credit bureaus, who then apply it to the data that
they have collected to generate a credit score. Therefore, you will have three FICO scores
from each of the major credit bureaus. Since each bureau may have collected different
amounts of data, your three FICO scores may differ, though they are likely to be similar.
A FICO score will range from 300 to 850. Generally speaking, the score must be above 620 to qualify
for a home loan. The average credit score in the United States is about 740. You will
want your score to be at least this high to get the best mortgage rates available.
Your FICO score is comprised of 5 components. The first, and most important, is payment
history. This makes up 35% of your score. If you are late making payments on your credit,
it will show up here. The second component is the amount of credit
you owe. It is 30% of your score. Combined, these two components are 65% of
your credit score. If you want to improve your credit score, focus on these two items.
The next factor is length of credit history. It counts for 15%.
10% of your score considers if you recently opened any new credit accounts. Recently opened
accounts may temporarily lower your score. The final 10% factor looks at the different
types of credit in your history. A wider variety of credit types can have a positive effect
on your score. Now let us look at how to maximize your credit
score. Before you even look at your credit score, there are some obvious things you need
to do immediately to begin improving your score.
First, pay off all your delinquent debts. It is not necessary to completely pay off
your credit card or loan balances. Just make sure you are not behind on any payments.
Second, always pay your credit card and loan payments on time. Making the minimum payment
on time is much better than a larger payment that is late.
It is these two actions that will have the biggest immediate impact on your credit score.
The next step is to get a free credit report from one of the three major credit bureaus.
Make sure there are no errors, fraudulent charges, or identity thefts. Do this at least
a couple months before you seek pre-approval for a home loan. This will give you sufficient
time to make corrections. Once you have corrected the errors on one
report, get your free reports from the other two credit bureaus and make corrections as
needed. Finally, you will likely want to get your
FICO credit score from at least one of the credit bureaus. You can get all three scores
from myFICO.com for $60, or go to each of the credit bureaus individually and pay about
$15 per score. If your score is above 740, you are ready
to move forward. If not, you may wish to consider waiting until you have a longer history of
making credit payments on-time and paying down more of your credit debt.
Your credit score does not consider your income or your assets. Though your credit score is
important, it is not the only factor that your lender will consider. Watch our video
detailing the 12 steps to buying a home to get a bigger picture.
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