How and Why You Want to Improve Your Credit Score
Let’s begin by looking at how different credit scores affect your interest rate and what it means to your monthly mortgage payment. Your credit score certainly isn’t the only thing that goes into how lenders determine the interest rate they will charge, but it is the biggest factor. Besides your credit score, other factors that determine your interest rate are the Federal Reserve Rate, how much you have for a down payment (loan-to-value ratio), loan type (fixed or ARM), and other considerations that go into the lender's underwriting process.
Credit Score Statistics & Why You Should Care
Statistics don’t mean everything and you are not a statistic. You can be sure that lenders study statistics thoroughly. According to the Federal Housing Authority (FHA), this is a breakdown of the percentage of loans approved by credit score ranges:
· Range of 500 to 619 – 11.58% of borrowers.
· Range 620 to 639 – 15.53% of borrowers.
· Range 640 to 679 – 39.07% of borrowers.
· Range 680 to 719 – 21.28% of borrowers.
· Range 720 to 850 – 12.54% of borrowers.
As you see, the vast majority (39.07% + 21.28% = 60.35%) of borrowers fall in a credit score range between 640 and 719. If your score is in that range or higher, you can feel confident of being approved for a mortgage and being given a decent interest rate.
How to Improve Your Credit Score
This is what you can do the quickest:
· Pull your credit report and resolve any issues or errors.
· Pay your bills on time, every time.
· Pay down debts, particularly high-interest ones.
· Settle or resolve any collections or overdue accounts.
Clean up your credit report! According to a 2019 study conducted by the Federal Trade Commission, one in five people has an error on at least one of their credit reports. Errors on your credit report always lower your credit score. Before you do anything else, go to AnnualCreditReport.com to get your credit report from each of the three big nationwide credit-reporting companies:
You want to learn how to read the details of the reports (especially what the codes mean) and review everything. A lot of errors are found in these reports. Anything from a different person with the same name as you being reported on your account to payments that you made not being credited to your account. Each report should tell you where to send a dispute.
Scores between 500 and 700 often see the most dramatic and fastest results – just by cleaning up account errors.
The credit score model (FICO) has five major components. Each has a different weight, meaning that improving the component with the highest weight improves your credit score faster. The components and weights are:
· Payment history - 35%
· Amounts owed – 30%
· Length of credit history – 15%
· New accounts – 10%
· Types of credit – 10%
The “payment history” counts the most. Late payments, defaults, and bankruptcies have the biggest effect on the score. That’s history and you can’t change it much. What you can do is obtain a copy of your credit report and review it for accuracy. You can dispute anything you don’t think is accurate. The original lender has to document the accuracy. If you dispute it and the lender can’t document it (they often can’t), the bad rating must be removed from your credit history. This improves your score.
Something you should know is that the bad stuff counts less and less as time goes by. The weight of old information counts less than new information.
The “amount owed” component fools a lot of people. Many people think that having a high balance owed and making payments on time is the best way to improve their score. The high balance does damage. The FICO model wants to see consumers borrowing a small amount of the available credit limit AND keeping payments current. That small amount is close to 30% of the available balance. Instead of one high balance, your score will benefit from two lower balances – and on-time payments. This is also better than paying a little extra on a bunch of accounts with small balances owed.
Also, pay close attention to the “length of credit history.” The longer the history of on-time payments to a particular account, the better for your score. Even if the balance was paid off years ago but you could still borrow against it today (like a line of credit or old store account). Don’t close these accounts. Leave these open. This shows a good history of repaying loans.
You want to be very careful about opening “new accounts” shortly before applying for a mortgage. Definitely don’t do it during the application period or before the loan closes. Opening new accounts send up red flags that you might be living on credit to pay your monthly expenses.
Doing these few things can be the most effective way of quickly raising your credit score to make you a happy homeowner in a few short months!
If you need more information or have questions, please call us. You can also reach us by calling at (678) 570-8123. We'll be glad to help you!