Understanding & Optimizing Your Credit Score

Credit Report Overview

If you are in the market for a large purchase such as a home, it would be wise to check out your current credit scores. A good credit score can make a huge difference in the amount of money you can borrow and the interest rate you can get from lenders. A little effort and planning can save you thousands of dollars over the life of a loan.

Just as you eat better and exercise to enjoy the benefits of a healthier physical you, your financial health is also important. One aspect of financial health is a strong awareness of your credit standing. Your credit results are gathered and organized by 3 main credit repositories, Equifax, Experian and TransUnion. Each repository may have slightly different information and that is why you need to review each periodically for accuracy.

How To Check Your Credit Score

Did you know that you’re eligible for one free credit report each year from each of the three nationwide credit reporting companies – Experian, Equifax, and TransUnion? If you want to check your credit – you can use a trusted source like AnnualCreditReport.com. They are an authorized Federal Trade Commission source so you know you it’s a trusted source that won’t be charging for extra fees.

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3 Ways To Request A Report from Annual Credit Report

  1. Visit annualcreditreport.com and complete the online form
  2. Call 1-877-322-8228 to speak to an Annual Credit Report representative
  3. Mail in a request form to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

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Online and App Based Credit Reports

If you want a more “real time” view of your credit report, there are now some very good an reputable sources to get this information instantly. A very highly rated free online tool and mobile app called “Credit Karma” is very easy to use and understand. This feature rich system is totally free to use and gives you instant access to your credit reports. Currently, Credit Karma allows you to view your credit report from both TransUnion and Equifax with updates once a week. They also provide you a wide range of tools to understand why your credit score is what it is and how to improve it. The site makes money by providing you offers for different types of credit cards and other financial products based on your profile. The offers are well designed in the flow of information on the website and are not distracting and overbearing like you see on some websites. Visit creditkarma.com or search for the app in your preferred app store to use this great tool to check and manage your credit.

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FICO Scores

Another important credit metric that many lenders will look at is your FICO score. A FICO score is a credit score developed by FICO, a company that specializes in what's known as “predictive analytics,” which means they take information and analyze it to predict what's likely to happen. FICO scores are used by 90% of the top lenders to determine your credit risk. Your FICO score is not always the same as some credit scores you may see advertised, because there are different credit scoring systems. Be aware of the different credit reporting websites and make sure they say FICO to ensure you know your true FICO score.

If you want to check your FICO score, Discover provides a free online tool to view your credit score card and FICO score from Experian. This adds information on the third credit bureau that is not available using Credit Karma (TransUnion and Equifax), so between the two services you can get a free look at your scores from all three major credit bureaus. To check your score for free with Discover visit https://www.discover.com/free-credit-score/.

Other Paid Credit Report Tools

MyFico LogoThere are also many good tools out there that you can pay a monthly fee to get your credit report and FICO information from.  Be sure to make sure you look at reviews for the service you are considering to make sure you are getting your money’s worth. MyFICO.com for example, charges about $30/month to provide you with access to all three credit bureau FICO scores and credit reports in one place. Vistit http://www.myfico.com to learn more. Each of the three main credit bureaus also have online tools for managing your credit report through their respective websites.

Check Your Credit Report for Inaccuracies

Whichever tool you decide to use to check and monitor your credit, when you review your credit report, be sure it is accurate. Look for inaccurate areas like name, addresses, employers, open and closed credit, and credit that you do not recognize. If you do find inaccuracies, there is a dispute process that will help you investigate and correct it. Please know that fixing an error with one repository does not correct the error with the other two.

For more information on specific question here is a link to a good governmental resource on Consumer Credit Questions from the Consumer Financial Protection Bureau.

How Credit Checks Affect Buying a Home

You probably know that your credit score is something that all mortgage companies will look at when you apply for a loan. But, how does your credit score and credit checking actually affect buying a home? Here are a few of the basic things to know before your apply for a mortgage.

Why do lenders look at credit scores?

Lenders will request access to your credit score because it’s an indication of how well you’ll pay back a loan. It tracks all sorts of factors related to your history of paying back credit cards and debt.

What’s an acceptable credit score?

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300 - 640 = Bad credit

You might have a credit score of 630 or less if you’ve had issues with bankruptcy, a history of missed payments or if you don’t have any credit history.

640 – 680 = Fair credit

This is an average credit score. It tells the lender that you do not have too much bad debt. You might want to consider paying down credit cards and/or ensure you’re always paying your debts on time.

680- 720 = Good credit

You will be an ideal candidate for most loans and shouldn’t worry about being penalized for your credit score.

720 – 850 = Excellent credit

You will get the best rates available as a reward for paying down your debts on time and not having any history of issues.

How does checking my credit score affect my score?

There are two types of inquiries – soft and hard. Hard inquires are the only type that affect your credit score.

When you apply for credit, a lender or credit card company checks your credit score when making a lending decision, which is considered a hard inquiry. A hard inquiry will typically lower your credit score by a few points and will stay on your credit report for two years. Fortunately, as time passes, the damage to your credit score usually decreases or disappears, often even before the hard inquiry falls off your credit report.

A soft credit inquiry is credit check that occurs when a person or company looks at your credit report as a background check, like when a mortgage lender preapproves you for a loan. Soft inquiries won't affect your credit in any way.

How does my score affect getting a home loan?

Most mortgage companies will look at your credit as a way to determine your interest rate and the types of products available to you. The better your score the lower the interest rate and the more product options you will have. Knowing your credit score and ensuring there aren’t any outstanding issues associated with it, could end up saving you thousands when applying for a mortgage.

What factors impact my credit score?

There are many factors that can impact your credit score but they generally break down into the following main categories with varying degrees of impact to your score as follows.

 
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1. Payment History – 35%

Make sure you pay your credit card bills on time. Each time you are late with a payment your lender can and often will ding your credit report. Even small mistakes here and there can be a major drain on your credit score as this is the most important category of all. The good news is you can turn things around with 3-4 months of on time payments across the board. Consider automatic payments through your online banking or lender to make sure you don’t miss anything.

2. Debt Usage – 30%

One of the main factors here is your overall debt to credit limit ration.If you are using more than 20% of your total available credit limit each month your score will suffer. Try to keep the usage of your overall limit under 20% to improve your score for this area. Outstanding credit card debt is also particularly painful to your credit score. One of the best ways to maximize this part of your score is to utilize 10-20% of your credit card limit each month and pay it off in full each billing cycle. Not only will you not suffer credit card interest charges, your credit score will improve as well.

3. Credit Age – 15%

There is not a lot you can do to impact this category in the short run. This factor looks at how long you have had a calculable credit score and the average age of your credit accounts. While opening up new accounts is necessary and beneficial in the long run, if you are trying to optimize your score in the short term avoid opening new accounts because it will bring down your average credit age score and could negatively impact your score in the short term.

4. Types of Credit – 10%

Your account mix rewards you for having a high number of various types of credit accounts including revolving credit accounts, mortgage loans, automobile loans, and student loans. One way to improve this score over the long term is to have multiple credit card accounts, just be sure to follow the usage guidelines and keep the balances low and pay them off each month if possible.

5. New Credit – 10%

This aspect of your score has to do with the amount of credit inquires you are receiving.You can hurt your score by applying to several personal loans or credit cards at the same time. Having a new inquiry won’t destroy your score in this area but you should always be careful how many credit requests you are allowing lenders to make. Your grade in this area will look at the total number of inquiries being made in different time intervals. Again, if you are looking for a short term optimization of you credit score, avoid any unnecessary credit inquiries.

5 Simple Ways to Improve Your Credit Score

  1. Ensure you make every payment on time. Set reminders or better yet, setup automatic payments to make sure you are never late. This is one of the largest criteria’s to you score and one you have total control over.
  2. Remove high interest credit card debt as soon as possible. Good debts like mortgage and auto loans should be paid on a regular installment but credit cards should be kept under 10-20% of your credit limit if possible. Paying these debts down will do wonders for your score.
  3. Ask for credit limit increases to help lower your overall spending percentages. The higher your limit, the lower your typical monthly spending percentage will be on your report which can help improve your score.
  4. Leave good debts on your report.Some people try to remove old debts from their report as soon as they pay them off, but good debts show that you have history of paying off loans and can only help your score.
  5. Check your report regularly and remove any errors or fraud. If you see something on your report that doesn’t look right, take the time to investigate it and dispute any incorrect information that may be harming your score.

Building a great credit score takes time and patients but is worth it in the end. Good credit is a gateway to better interest rates and lower cost of purchasing everything from a home to a car to many things you need and want in life. When used responsibly, credit can actually save you money and provide significant rewards for purchasing things you need to buy like gas, groceries, and clothing. Following the rules outlined in this guide should give you a good start towards building a great credit score.