Question of the Month:
Q. What Do I Need to Know About Credit
Scoring?
A. What is it?
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.
The Illinois Association of REALTORS® has many
financing resources for consumers and potential
homebuyers available. 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. .
Credit
Reports - Where Can I Get a Copy
You need to be sure to list your full name,
spouse's name, addresses for past two to five years,
phone number, Social Security number, date of birth
and current employer. Requests for couples must be
signed by both husband and wife.
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