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Dec 28, 2020 | By
What's so important about a credit score?

What's so important about a credit score?

A credit score, three little numbers, can make or break your chance to buy a home. Fortunately, that score isn't set in stone. It's entirely possible to raise your score and increase your chances of getting a home loan.

Like steering a ship, you can't change your credit score overnight. But with some planning and a little time, you should be able to take steps to move your score in the right direction.

What is a credit score?

A credit score is a three-digit number that helps lenders determine whether or not to give someone a loan based on the perceived likelihood they will repay it. The score takes several factors into account, including whether or not that person pays bills on time, how much debt he or she has, and the number of open accounts (such as multiple credit cards, auto loans, personal loans, student loans, etc.)

The range of scores differs depending on the company and type of credit, but generally, it ranges from 480 to 850. A low number indicates that a person is a high credit risk, meaning someone who has a history of not repaying their debt.

The higher the number, the higher the likelihood that lenders will take a risk and loan money to that person or give them a lower interest rate.

How the score is determined

Lenders can use two scoring models that show credit scores, FICO and VantageScore. FICO, Fair Isaac Corporation, created the original credit score model so that consumers and lenders would be using consistent and fair information.

Depending on the scoring model used, the number might be different because each model weighs certain factors differently. Although most lenders use FICO, even FICO scores can differ depending upon the type of loan being requested. The base FICO score takes different aspects into account than one for an auto loan.

Regardless of who calculates the score, the number one factor is consistent payment history, which equates to 35% of the FICO score. If you're paying bills on time, you are already a step in the right direction.

The amount of debt owed makes up 30% of the score for FICO, and the length of credit history comprises 15%. Other smaller factors for the score are the mix of types of credit accounts (credit cards, car payments, educational loans) and any new credit that was recently acquired.

VantageScore looks at trends, such as whether you pay your bill in full each time. They also give less weight to medical collections versus FICO.

Give a little credit to the Bureau

Three major credit reporting agencies, or credit bureaus, are utilized by lenders and customers in the United States: Experian, Equifax, and Transunion. They collect, update, and report an individual's credit history. These reports can be requested on an annual basis and can help you ensure that there aren't any errors.

Visit annualcreditreport.com for a free report from each of the three agencies. Typically it's one free report each year, but due to COVID-19, they are now providing free reports on a weekly basis until April 2021.

It's essential to know the information in these reports, along with your FICO or credit score. Lenders will usually utilize multiple reports to determine whether or not someone is a reasonable risk for a loan.

Experian and Equifax also provide scores similar to FICO, but their detailed credit reports give lenders more information than simply three numbers. The reports will show all of the debt that a person has acquired in the last 7 to 10 years and how that person managed to pay it.

Finding the Score

The easiest way to get your FICO score is to contact your credit card company or bank. Most will provide the score for free on a monthly basis. Sometimes this number is shown on your monthly statement.

Beware of websites that advertise a "free credit score." Some are truly free, but others may require a monthly subscription after a free trial in order to use their services. You can always pay for your score at many companies but try free options first.

Annualcreditreport.com - This is the official source for a free credit report.

Changing the Score

Knowing what factors go into calculating your credit score is helpful in learning how to improve it. Adjusting a credit score also might take some time, so check into your credit score now before you need a loan. If you see any discrepancies on the report, dispute them right away.

Then take these steps early in the process to ensure you have the best credit score possible:

  • Have a mix of credit accounts. This might include store credit cards, a car loan, and a bank credit card. Lenders want to see that you can balance and pay for multiple types of debt.
  • Keep credit card balances low. Spending to the limit on credit cards could indicate a lack of restraint. If it only happens on rare occasions and the balance is paid in full within a reasonable time frame, that will lessen any negative impact.
  • Pay bills on time. It's merely the number one impact on credit score. An occasional late payment won't shift the needle drastically, but if there's a pattern for late payments or if any bills have recently gone to collections, that will hurt your score.
  • Don't apply for any new credit before you ask for a loan. If your credit score is checked right after you've acquired new credit cards or taken on new debt, your score might be lower.
  • Have a lengthy credit history. The longer you've had a credit card, the higher the score. It's worth applying for a credit card years before applying for a loan and not using it to help raise this portion of the score. FICO needs at least six months of credit history to make its score, so it's essential to open credit cards as early as possible.

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Covid-19 and Credit

Many organizations are working with customers to ensure that the financial hardships of 2020 don't impact their credit scores. There are steps everyone can take to help minimize the impact:

  • Call when you can't pay a bill. Contact any lenders, credit card companies, student loan organizations, or even utilities if you're struggling to make payments. They may be able to provide assistance, place your loan in forbearance, or delay payment. Lenders also may be able to pause your payments or remove late fees in certain circumstances if you have an excellent prior payment history.
  • Pay what you can when you can. Even paying a small portion of a bill or the minimum payment is better than nothing. That attempt to repay the debt will be factored into a credit report.
  • Check your credit report and scores regularly. Dispute anything that looks unfamiliar or strange. Addressing any possible fraudulent activity is especially critical if there's a chance your credit is already at risk.

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