Your credit score is one of the largest factors that will affect how much your monthly payment will be on your new home, and thus how much home you can afford. These days many mortgage companies will work with people who have poor credit, however they are not always the best option since poor credit loans usually have much higher interest rate, hidden fees, more upfront costs, pre-payment penalties and other factors that could cost you LOTS of extra money in the long run.
One of the most important things you can do to ensure that you are getting the best deal possible on your loan is to clean up your credit report. There are many simple ways to increase your score, and although can sometimes take several months it is well worth the effort for the money you will save. Even if you don't have several months to wait there are some quick things you can do that can pop your credit score up a few points that could make all the difference in the interest rate you receive. Keep reading for some tips on how to proceed.
Many people turn to credit repair companies in order to clean up their credit. These companies often make promises that they can't keep and charge extremely high fees to do things that you can easily do yourself. Even worse, some companies will take your money and do nothing at all! Avoid credit repair companies at all costs. A little bit of effort on your part will get you much better results than any of these companies could provide.
A FICO score is a number assigned to you that rates your credit worthiness based on the information contained in your credit report. FICO scores were created by a company called Fair Isaac & Co. who developed a statistical model of how likely people were to repay new debts based on their history with past debts, how much of their available credit they are currently using, how long of a credit history they have, as well as many other factors.
Credit scores usually range from 340 - 850. The higher your credit score , the more likely you are to get approved for a mortgage and get a better interest rate on your loan. Typically, borrowers with scores over 700 have more financing options and better interest rates available to them. However, there are mortgage companies who will loan to people with much lower scores, so don't get discouraged if your scores fall short.
Another important thing to keep in mind when thinking about your credit score is that each person typically has 3 different FICO scores. There are three major credit reporting bureaus - Experian, TransUnion and Equifax. Often times your credit file with each bureau will contain different information than the other bureaus, and this will cause you to have a different score with each bureau. Typically a bank will use your middle credit score to determine your credit worthiness. As an example, if you scores looked like the following:
Experian: 634
Equifax: 603
TransUnion: 657
The score that banks would use would be your Experian score at 634 since it falls between the other two scores.
So just how is your credit score calculated? This seems to be the burning question on everyone's mind, and it doesn't have a great answer. Fair Isaac & Co. won't release the details of exactly how they calculate scores since they are trying to protect their business model. They do however give some general guidelines as to what affects your score. Although probably not completely accurate it is thought that your score is based on roughly the following percentages:
35% - Your Payment History
30% - Amounts You Owe
15% - Length of Your Credit History
10% - Types of Credit Used
10% - New Credit
Information included in your credit report that goes into calculating your FICO score includes:
The best way to get your credit score is to purchase it directly from Fair Isaac & Co since this will be the closest to an accurate score. There are many other companies online providing credit scores, however they sometimes don't use the same scoring model as Fair Isaac & Co. and the scores they give you can vary greatly from your true FICO score. These scores from other companies are often referred to as FAKO's instead of FICO's in credit repair slang.
In addition, they offer a FICO score simulator so you can get an idea of how paying off some of your debt, taking out a new loan or several other actions will affect your credit score. Although it doesn't give you a complete picture of everything contributing to your score, it will give you a good idea of the effect of some of the bigger items contained in your credit report.
You will be charged to view your credit score, and currently the price is around $45.00 to get all three scores from the major credit reporting bureaus. This fee will also include copies of your credit reports along with your score, which will be vital to beginning your credit repair journey. To purchase your scores and reports directly from Fair Isaac & Co. visit this website:
Be sure to print off both your scores and your reports since you will need to reference them often on your credit repair journey. Another benefit of keeping copies of your report around is that you can compare them to future reports to see how effective your credit repair efforts are.
Although it is important to know what your FICO scores are, you can also just obtain a free copy of your credit report to begin your credit repair if you don't have the money to purchase your score right now. As of 2003 the Fair Credit Reporting Act requires that credit bureaus give out one free credit report each year. The official site to get your free copies of your reports is http://www.annualcreditreport.com. These reports are only available for 30 days, so be sure to print them out. Additionally because the credit bureaus are not required to give you your credit score you will need to purchase those seperately if you would like to see your score.
Beware of any other companies offering a free credit report. Typically these companies will give you a free report but will take your credit card information and charge you membership fees at a later date. They often say that you can cancel anytime before your card is charged but then make it nearly impossible to find how to cancel your account so you wind up getting charged anyway.
There are numerous factors that can adversly or positively affect your credit score. As was mentioned earlier in this article, Fair Isaac has not released all of the information on exactly what goes into calculating your credit score, so it is difficult to know exactly what to do to improve your score. Since we are working on improving your score, we will focus on the items that negatively affect your credit in this section. The following list contains items that have a negative impact on your score:
Late Payments, Charge Offs, Collections, Bankruptcies.These are the big items that affect your credit score since the score is calculated with the belief that your past behavior with credit is a good indication of how you will use credit in the future. Having late payments, collections, charge offs or even bankruptcies on your credit report will drag your score way down. These items stay on your credit report for 7 years (10 years or longer for a bankruptcy) and will continue to have a negative affect on your score that whole time. However, the older a negative item becomes the less impact it will have on your score. For instance, a payment that was 30 days late last month will have a much greater impact on your score than a 30 day late payment from 3 years ago. If you have negative items on your report, however, take heart. It is often possible to get these items removed from your report prior to the 7 year period by using the techniques in our guide. Even if these items can't be removed there are other things you can improve that will help to offset these negative factors and balance out your score.
Too many inquiries. Everytime you apply for credit, whether it is a credit card, loan or other form of credit, the company that you applied with will check your credit score. When they check your score it becomes a notation in your credit report that is known as an inquiry. While several inquiries a year is normal, if you have too many inquiries it is interpreted as a sign that you are in financial distress and are trying to find a way out through applying for credit. It can also scare away lenders who may think you have been approved for all those lines of credit you applied for and that they just aren't showing up on your credit report yet. This could potentially mean that you would be unable to pay back a loan from them because you have a much higher debt expense than your credit report is showing at the time they check it. While these things may or may not be true, having too many inquiries can definitely impact your score negatively. The good news is that inquiries are very easy to get removed from your credit report, and depending how many of them you have and how many are removed can quickly bump your score up enough to get a better deal on your loan. We discuss techniques for this in the repair section of our guide.
So now that you have your reports and scores in hand, you are ready to begin seeing what you can improve in your report to help increase your score. The first step is to read your reports and see what all is in there. You may be surprised to find items you have either completely forgotten about or that you don't recognize at all!
The Fair Credit Reporting Act (FCRA) was developed by the Federal Trade Commission (FTC) to help protect consumers and is the basis around which all credit repair efforts are centered. It is vitally important that you read and understand this act so that you know your rights. To read the entire FCRA follow this link: