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Guest view: Credit scores, credit repair and obtaining a home mortgage

Brad Dimmig - (Photo / Submitted)

A clear understanding of your credit profile and what is needed to keep your credit in good standing has never been more important in achieving homeownership goals.

Current mortgage guidelines have tightened with high emphasis placed on individual credit scores.

Each credit repository/bureau (Trans Union, Equifax, Experian) assigns a score to your credit report based on your credit history. The scores are calculated by computer models that are proprietary to each repository/bureau.

Scores range from approximately 300 to 900. The higher your credit score, the better your credit, and the more likely your chances of being approved for a loan or credit card. In many cases, a high score can even earn you a lower interest rate. Your score is important in the eyes of the mortgage lender, and your history of payment is indicative of how you will pay new debts.

A score below 690 is generally considered a “low” score. Currently, if you have a score under 600, you likely will not get approved for a mortgage. Under federal law, you have the right to question any item on your credit report that you believe may be inaccurate, or misleading. Negative items in your credit file are one of the primary causes for lowering your credit scores. Removing derogatory items can improve your credit score.

How to improve your score

A credit score reflects credit payment patterns over time, with more emphasis on recent activity.

• Pay your bills on time. Delinquent payments and collections can have a negative impact on credit scores.

• Keep balances low on credit cards and other “revolving credit.” High outstanding debt can affect a credit score negatively.

• Apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix.

• Pay off debt rather than moving it around. Also, don’t close unused cards as a short-term strategy to improve your credit score. Owing the same amount but having fewer open accounts may lower your credit score.

The most important credit score factors

Certain credit score factors are more important than others. Payment history and credit utilization ratios are among the most important in many critical credit scoring models, and together they can represent up to 70 percent of your credit score.

Opening a new credit card can increase your overall credit limit, but the act of applying for credit creates a hard inquiry on your credit report. Too many hard inquiries can negatively impact your credit score, though this effect will diminish over time. Hard inquiries remain on your credit report for two years.

How changes affect scores

Simply closing accounts not only lowers the number of open revolving accounts, but it also decreases the total amount of available credit. That results in a higher utilization rate, also called the balance-to-limit ratio (which generally lowers scores).

One change can affect many items on the credit report. It is impossible to provide a completely accurate assessment of how one specific action will affect a person’s credit score.

How long does it take to rebuild a credit score?

If you have negative information on your credit report, such as late payments, a public record item (e.g., bankruptcy) or too many inquiries, you may want to pay your bills and wait. Time is your ally in improving your credit scores. There is no quick fix for bad credit scores.

Start improving your credit by checking your FICO score from Experian data and reviewing the individual factors that are affecting your credit scores. Then, learn more about how to build credit to improve your scores over time.

A good credit score can open doors for you. From helping you qualify for the best interest rates and terms when you borrow money to influencing insurance rates, doors you never even dreamed existed. Landlords will consider your credit scores when you apply to rent, and even telecom companies might look at your scores before you lease your next smartphone.

Freecreditreport.com is part of a family of online consumer credit reporting sites belonging to ConsumerInfo.com, Inc., an Experian company. They allow you to check your credit score one time per year for free.

 

Brad Dimmig is president of Homesale Mortgage LLC and a partner in Homesale Realty.

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