Improving Your FICO Score May Be Easier Than You Think!
If you’ve been following mortgage news at all, you’ve probably noticed plenty of news on the lower rates. Mortgage rates today are low, but did you know you get your rate even lower? You can do this by boosting your credit score.
Your credit score is based on a system. Typically, with higher scores come lower mortgage rates.
Government-backed loans, such as the low down-payment FHA loan and the zero-money down USDA loan, allow for below-average scores; but in order to get the best conventional mortgage rates, you’ll want to have the highest credit scores possible.
MORTGAGE LENDERS USE FICO SCORING MODEL
There are many credit reporting companies. However, in the mortgage world, there are three companies which matter most — Equifax, Experian and TransUnion.
Collectively, these three firms are known as the “major credit bureaus”.
Each of the bureaus sells more than one “credit score” product and, for consumers on their respective websites, it can be a challenge to know exactly which “score” to review.
For those about to buy a home, the relevant scoring system, by bureau, is as follows:
- For Equifax, it’s the Equifax Beacon 5.0
- For Experian, it’s the Experian/Fair Isaac Risk Model v2
- For TransUnion, it’s the FICO Risk Score 04
These are the relevant scoring systems because, when a mortgage lender “pulls your credit”, it’s pulling your scores for these particular products. Your lender then takes the median of the three scores (the one in the middle), and calls it your credit score.
For example, if your credit scores are 620,640 and 700, your “score” is 640. As another example, if your credit scores are 700, 719 and 720, your credit score is 719. Credit scores are not rounded up or averaged.
Additionally, on a joint mortgage application, lenders will use the lower of the two middle credit scores, regardless of which borrower is the “primary wage earner”; or, whether it’s a mortgage with a co-signer.
Generically, credit scores are called “FICO scores”, named after the Fair Isaac Co., a pioneer in the credit scoring space. The higher your FICO, the better your mortgage terms.
RAISE YOUR CREDIT SCORES, GET BETTER MORTGAGE RATES
When a credit bureau prints your credit score, in addition to providing your raw scores, it will typically offer up to four ways by which you can raise your credit score.
The notes can be helpful, ranging from the general (“Balances too high”) to the specific (“Too many inquiries”). The notes can serve as a roadmap toward improving your FICO.
It’s not uncommon for a person to improve their FICO score by 100 points or more with attention to credit-scoring details.
There are only a few fool-proof ways to make drastic improvements to your credit score:
- Pay your bills on time, always
- Keep your credit card balances low as compared to your total available credit
- Keep “aged” credit cards open, and use them periodically
Ideally, a credit card balance should not exceed 30 percent of that card’s available balance. This credit score metric comprises thirty percent of your overall score so, if you’re unable to pay down your debts, consider asking your credit card company to raise your total credit limit.
Raising your limits can be as effective in raising your FICO as paying down your existing balances.
If you’ve had a derogatory event on your credit report, avoid credit repair companies until you’ve done your due diligence. Time is often the best healer of a “bad credit report” — sometimes, much better than settling with a debt collector.
GET YOUR CREDIT SCORES FOR FREE
Accessing your credit scores can be expensive. Thankfully, there’s a way to get them for free — all you have to do is ask a lender. If you are not at a point where they are comfortable pulling your detailed scores, a good lender will direct you to a site where you can obtain your scores for free. If you would like to set up an appointment to see where your credit score stands and how it relates to purchasing a home, feel free to contact us!
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