According to Consumer Reports, during the life span of a $150,000 mortgage loan, individuals that have excellent credit scores can pay approximately $138,000 less than others that have poor scores. Finding out what your score is, allows you to change it and get a better loan.
What Is A Credit Score?
Credit scores range from 300 to 850 and are used by lenders to get a brief history of how you have paid your debt. The scores are rated as:
760 to 800 – excellent
700 to 759 – good
700 or less – fair to poor
A general lender’s practice requires a 620 score to qualify for most loans.
Check Credit Reports
There are 3 main credit reporting agencies, Equifax, TransUnion and Experian. By law, they provide a free credit report once a year. Visit www.annualcreditreport.com.
Get 3 credit reports because you will want to check the same ones that your lender sees. It gives you an opportunity to fix any mistakes, add explanations or remove information older than 7 years.
The score is calculated using 5 factors:
1. What You Owe
Available credit is compared to how much you owe. Lenders look for 20% or less of credit usage. Don’t open another credit account to increase your credit limit, as it only shortens credit history.
2. History Of Payments
This shows how you’ve paid on every debt. Paying on time shows responsibility and trustworthiness to lenders for mortgage loans.
3. Credit History Age
This shows the age of your oldest account, typical age of all accounts and most recent activity. Opening an account may shorten the age, but keeping an old credit card shows established history.
4. Recent Credit Card Inquiries
Too many inquiries lowers your score, though many inquiries in a short period may not lower your score because a credit agency will realize you’re comparing loans.
5. Kind Of Credit
The report will show how many of each kind of account you have such as credit cards, mortgage loans, and installment loans. Report mistakes to the agency immediately.
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