Small Number. Big Impact. Credit Score Basics

Small Number. Big Impact. Credit Score Basics

Small Number. Big Impact. Credit Score Basics

YOUR CREDIT SCORE IS A VERY IMPORTANT FACTOR WHEN PURCHASING OR REFINANCING YOUR HOME

Your overall credit picture includes your credit report and your credit score. Your credit report alone does not give your lender enough
information to make a decision. That’s where your credit score comes in. Your credit score takes the info in your credit report and creates a number that represents many things such as your payment history, length and type of credit, how much credit you use, how much credit you have available and how many times other lenders and creditors have pulled your credit information.

Although the components of your credit score don’t change, different credit reporting companies may interpret the information differently, leading to different credit scores.

Maintaining a good credit score can mean big savings when you purchase or refinance.

Each credit score model has a set of ranges that help determine your creditworthiness. FICO (the Fair Isaac Corporation) is the most popular credit score provider. To a lender, your score equals risk. The lower the score, the higher the risk. Credit scoring is a predictive model of how you will or will not make payments on time in the future, based on past habits. You may have some influence over the factors that contribute to your score, but it won’t be overnight.

UNDERSTANDING YOUR FICO SCORE

Score Range
Evaluation
What It Means To You
300-550
Poor Credit
Most likely, your application will be rejected and you will need to work on improving your score
550-620
Subprime
You may get credit in this range, but interest rate and terms may not be exactly what you had hoped for
620-680
Acceptable
You will most likely get the credit you apply for. You are considered a low risk to creditors
680-740
Good Credit
You will almost always be approved for your loan and you will be eligible for good interest rates
740-850
Excellent Credit
If you fall into this category, you have an excellent chance of getting a loan with a good interest rate

How Your Credit Score is Calculated

35%
PAYMENT HISTORY
30%
OUTSTANDING BALANCES
15
LENGTH OF CREDIT HISTORY
10
TYPES OF CREDIT USED
10
NUMBER OF CREDIT INQUIRIES
35% - Payment History

This indicates if you have made your payments on time to creditors and has the biggest impact on your score.

30% - Outstanding Balances

This represents how much you owe versus how much available credit you have. You should strive to keep your balances on revolving credit as close to zero as possible.

15% - Length of Credit History

The longer your accounts are open, the better. A lot of people think that they should close unused credit lines, but if you close your oldest credit line, it may negatively impact your score.

10% - Types of Credit Used

You should have both secured and unsecured credit to reflect a diverse mix of credit. A mix of credit cards, auto loans, and mortgages paints a more positive picture than just credit cards alone.

10% - Number Of Inquiries

Frequently applying for credit can look like desperation to lenders. This section will show how many inquiries made in a six-month period.


Your credit score can impact the type of loan you may qualify for. It is rare that you will find a lender who will give you a loan if your credit score is less than 620. The higher the number, the better your chances at getting good interest rates and the kind of loan you want. A 2% difference in your interest rate could cost thousands of dollars over the life of your loan, depending on your loan amount. myFico.com has a calculator that gives you an idea of what your interest payment would look like based on credit score ranges.

Impact on Interest Rate

On average, a person with a low credit score will have interest rates 1-2% higher than those with a credit score of 740 or higher.

A $250,000 loan at 5.25% interest will cost $243,650.00 in interest over thirty years. That same loan at 4.25% interest will cost $189,933.40. That’s nearly a $54,000 difference. You could do a lot with that kind of money.

Applicants will often ask lenders, “What score do I need to get a good rate?” That is a tricky one to answer, as there is no standardized chart of the rates you will get for specific scores. Lenders use loan level price adjustment (LLPA) information produced by investors such as Fannie Mae and Freddie Mac to establish your interest rate. Using this model, your interest rate is impacted by loan-to-value (LTV) and credit score. Once you submit your application, it’s crucial that you don’t make any changes to your credit profile.


Here are some additional tips to keep in mind.

Credit "Do's"

  • Do join a credit watch program that alerts you to changes in your credit history.
  • Do keep current on existing accounts. One 30-day late payment can cost anywhere from 30 to 75 points on your credit score.
  • Do keep your normal credit habits. Sudden changes can cause red flags and halt the process.

Credit "Dont's"

  • Don’t apply for new credit, change jobs or make any changes to your income or employment status.
  • Don’t pay off collections accounts or charge offs unless the lender directs you to do so.
  • Don’t max out credit cards. Just because you’ve been approved doesn’t mean that you’re totally in the clear. Running up credit cards could drop your score overnight and impact your loan.

Requesting a Copy of Your Credit Report

Did you know that there are ways to get your credit score for free?

Federal regulations give you the right to one free copy of your credit report every year. Additionally, you are also entitled to a free copy if you are denied credit. Take advantage of these freebies.

You can obtain your credit report from annualcreditreport.com. Other websites may charge a fee or invite you to join credit monitoring services that offer a free trial. It is truly free. There are links to other services but there is no charge for your credit report. Please note that the free report does not include a credit score.


How to Check Your Credit Report

Step 1:

Go to annualcreditreport.com

Step 2:

Click on “Request yours now!” or “Request your free credit reports” to start the process.

Step 3:

Complete the online form.

Step 4:

Check the box for which report you would like to request.

Step 5:

Answer some personal questions. The info is used for security purposes.

Step 6:

Write down your report number or print the report.

Step 7:

Review your report to ensure accuracy.

Step 8:

Contact the credit information issuer to dispute any inaccuracies. You can also file a dispute through the credit reporting agencies.


You should receive a response from the CRA within 30 to 45 days. If the error has been corrected, they will send you a fresh copy of your credit report at no charge to show you that the item has been removed. They will also send a corrected report to any entity that received a report that contained errors within the last six months.

If you cannot have a disputed item removed, you have the right to include your side of the story on the credit report. Your statement should be a concise explanation (100 words or less) as to why you are challenging the item in question. From that point on, this notation will be included in your credit report as long as the item in question remains on your report.

Disputing errors and credit remediation

If you find that you have errors on your credit report, follow this procedure to correct those errors.

  • Make a copy of the report and circle the item(s) you are questioning. Keep the original copy for your records.
  • Prepare a letter to the Credit Reporting Agency (CRA) that provided you with the report in question, and request to have the erroneous item(s) removed. If you have proof of payment for an item in question, include a copy of that documentation.
  • Prepare a letter to the creditor reporting the problem, especially if you feel you are a victim of fraud or identity theft. Inform the creditor that you are disputing an error reported to the CRA, state why the claim is inaccurate, and include any relevant documentation to prove your point.
  • Send your correspondence via certified mail.

You should receive a response from the CRA within 30 to 45 days. If the error has been corrected, they will send you a fresh copy of your credit report at no charge to show you that the item has been removed. They will also send a corrected report to any entity that received a report that contained errors within the last six months.

If you cannot have a disputed item removed, you have the right to include your side of the story on the credit report. Your statement should be a concise explanation (100 words or less) as to why you are challenging the item in question. From that point on, this notation will be included in your credit report as long as the item in question remains on your report.

There are services available to help you with your credit.

If you would like to work with a credit repair service instead of trying to tackle credit issues on your own, we can help you get started. We will do our best to refer you to a reputable credit remediation service. We will also review your credit report with you and help guide you in the right direction to improving your overall credit picture.

OVERCOMING CREDIT ISSUES

Let’s say that your credit score just isn’t where it needs to be to get you a loan or the kind of rate you were hoping for. It’s a tough situation to be in, but with some hard work and patience, you can improve things and try again.

What can you do to improve your credit?

  • Be aware of your credit habits.
  • Pay down balances.
  • Don’t close out older, seasoned accounts. The age of a credit account impacts your credit score. Longevity is a good thing.
  • Request a credit report annually and dispute items that don’t seem right.
  • Pay your debt on time.
  • Distribute debt over your revolving accounts. This means that if you have one credit card that is at its limit, but have two others that haven’t been used, transfer some of the balance of the maxed out card to the other two cards. This will evenly distribute your debt and change your ratio of available credit versus debt.
  • Keep accounts active. If you have a couple of credit cards for emergencies, try to make at least one small purchase on the cards a few times a year to keep them active. If you don’t use a card for six months or more, it won’t show up on your report and may impact your credit score.
  • Limit the number of credit cards or revolving credit cards (department stores) to 3-5 cards. Keep your debt manageable.

Reap the rewards of having a good credit score.

If your biggest issue is that you just don’t have enough credit to get a loan, start by opening small lines of credit that report to at least one of the major credit reporting agencies (Equifax, Experian, TransUnion). Then, make small purchases and pay them off. Establish a checking and/or savings account. Ask your bank or credit union about credit cards they offer to help you build credit. Some offer low-balance secured credit cards that require you to put down a deposit and build credit over time.

You do have some control over your credit and can earn the benefits of having a good credit score. Contact us if you have any questions or need some help getting started.