Everyone knows that we are scored by three different credit companies. Credit scoring is a numeric way of weighing various financial factors, like income, debts, job history, credit history and other factors, which can predict the likelihood of the borrower defaulting on the mortgage. While there are a number of credit scoring models used, most lenders seem to use the Fair Isaac & Co. (FICO) score that ranges from 300 to 850. The lower the score the higher the risk.
The score is developed by giving weight to the following areas:
Record of timely payments on loans- 35%
Amount and type of outstanding debt- 30%
Length of credit history- 15%
Mix of accounts, credit cards, dept. stores, finance companies, bank loans-10%
Number and types of account opened recently-10%
An A rating entitles borrower the prime interest rate, A- pays .5%-1.0% more interest, B pays 1.0%-2.0% and C pays 2.0%-3.0% more than A, and so on.
Here are some tips to help: The longer that you have had credit without late payments the higher the score. The more sources of good credit references that you have the higher the score. On the negative side, slow payments lower the score, as do high loan balances. If account balances are 75% or more of the credit limit, it may signal high financial leverage and a higher risk . Credit balances should not exceed 30% of credit limit. Borrowers should not open many new accounts if they desire high credit scores.The single most important thing one can do to improve your credit score is pay timely. A payment that is more than 30 days late in the past year may harm a credit score more than a bankruptcy that occurred more than 5 years ago!
Never use consumer finance companies, as credit scores are lowered for those using this type of credit.
WHAT TO DO TO PURCHASE A HOME
Purchasing a home is the largest investment that most people undertake in their lifetime. Since credit scores are very important factor in determining what terms the buyer would receive on the financing in the purchase of a home, buyers should know what they can do to improve their credit scores.
First thing is get credit scores from the three major credit bureaus, Experian, Equifax, and Trans Union. These scores should be similar, if not, then there are discrepancies that need to be looked in to. If you find any errors, they should immediately be challenged in writing by filling out a dispute form located on the back of the credit report. Once the credit bureau as received the written challenge, they must notify the retailer and then the retailer has 30 days to respond in writing. If they fail to respond the consumer gets the benefit of any doubt, but the down fall it takes 30-45 days to correct it. It is recommended that the buyer get credit scores 45-60 days prior to closing on home, to give enough time to fix errors.
Do not make inquires for additional credit such as department store, auto dealers, furniture etc. Recent inquires lower scores.
Payoff as many outstanding balances owed on credit cards and other month to month and do no use credit cards until after closing.
Pay obligations timely.
Do not use credit cards to pay off another during 30-45 days of closing period, as both credit card balances will show up increasing debt ratio.
Do not use consumer finance companies. They lower your score.
Never go to consumer counseling service when you apply for home loans. This alerts credit bureaus that you are unable to pay bills and will have an effect such as bankruptcy would. If you have relatives that are willing to help you, have them pay off you credit cards to help wipe out debt. Present estate gift laws allow relatives to give $11,000 per year. Another way a relative can help is to buy down the mortgage rate, or they can act as co borrowers. It is always good to check your credit report yearly. We found someone used my husbands name and SS# and we had a judgment on one of the three reports. I suggest you pull your credit minimum once a year.
I hope this was informative for you and your friends. I hope you are doing well. If you need anything call me 352-266-2637.
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