What Do I Need to Know About Credit Scoring?
Providing specialized loan programs and credit resources are just a
few of the ways Illinois REALTORS® are working to help Illinois
residents achieve the dream of homeownership.
What is credit?
Credit is a determining factor to whether you can obtain financing and
at what cost for the purchase of a new home. Lenders consider credit
scoring when determining the risk associated with any loan application,
especially for homebuyers.
The first step in improving your credit rating is to know where you
currently stand. Your credit records have been reduced to three-digit
scores commonly known as a FICO, or Fair Isaac & Co, score. Assigned to
you by each of the three major credit bureaus (TransUnion, Experian and
Equifax), your score shows how likely you are to pay back a loan on time
– the higher the score, the lower your presumed risk of default. By law,
you may obtain one free report annually from each bureau online at
www.AnnualCreditReport.com. By accessing your credit information one
agency at a time, you can get a free credit report three times yearly.
How is it calculated?
The U.S. average credit score is 678 according to Experian’s National
Score Index. Credit scores can range from 400 to 900 and are based on
the length of your credit history, the mix of credit you already have
and your number of recent credit applications. Factors include a
person’s length of residence at a designated location, length and type
of employment, income history, total amount of available credit,
financial obligations, amount of credit used, and history of payments.
Can scores improve?
Once you obtain your FICO score you can work toward improving it. When
it comes to something as important as your credit score it can take some
time. Here are some tips to get you started:
- Pay
your bills on time. Your payment history,
including late payments and foreclosures, can count for one-third of
your credit score. Accounts more than 60 days past due will be indicated
on your credit report. As the length of your on-time payments increase,
so too will your score.
- Check your credit report for errors. Removing errors,
especially those negatively reflecting late payments or unpaid credit,
is one of the easiest ways to improve a credit score. Look for expired
negative records and file a dispute if necessary.
- Reduce your balances. One-third of your
FICO score depends on the total amount of balances you owe versus your
total credit limit. Try to keep your balances less than 80 percent of
your credit limit to maximize your score benefit. Start with those
credit cards that are closest to their limits.
- Keep
older credit lines open. Having a long history
of active accounts shows that you are a good credit risk. It also
accounts for 10 percent of your credit score. Try to use your oldest
cards regularly for small purchases and pay balances each month.
- Use credit – but use it responsibly. This includes having
credit cards and installment loans with timely payments. Accounting for
15 percent of your score, a balanced account including a mortgage
payment can help homeowners boost their score.
- Avoid new credit. Opening new credit
will lower your average account age. In addition, the number of new
applications counts for 10 percent of your score. Under the Fair Credit
Reporting Act, you may limit “prescreened” offers by removing your name
from nationwide lists. Apply in moderation and take on new credit only
when you need it.
- Check regularly for identity theft.
Agencies may only provide your information to those with a valid need,
such as a creditor or insurer. In addition, you must give consent for
this information to be seen by an employer.
For most, credit is a way of life. Installment payments and credit cards
can be useful financial tools if they are kept under control, but many
let credit control them.
Consumers are advised to obtain copies of their credit reports to make
sure all information is correct before applying for a loan. Incorrect
information should be reported to the agency as soon as possible.
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