First-Time Buyer's Guide to Better Credit
Choosing a lender isn't the first step in becoming a homeowner. The content of your wallet starts the home buying process. Without an above average credit score, purchasing a house is more difficult and, you could end up renting for another couple of years in Cary, North Carolina until you build up your score.
A FICO score is a collection of your years of credit history based on a model developed by Fair Isaac and Company. Most people usually have a score of 600, but scores are tiered from 300 to 850. Job loss has been common in the last few years, but FICO scores aren't necessarily adjusted "on a curve." A low score is a low score and that often means you can't get credit. Some of the pieces in calculating your FICO score include:
- Credit to Debt Ratio — How much do you owe versus your available credit?
- Credit Inquiries — Do you have too many open accounts?
- Types of Credit — Do you have a healthy mix of loans and credit cards?
- Payment History — Do you pay your bills on time each month?
In reviewing your credit history, you'll find that you actually have three reports. Experian, Equifax and TransUnion — three of the major credit reporting agencies — use a slightly different models to determine your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. As a result, you have three scores, one for each scoring model.
Lenders want to ensure that allowing you a loan isn't a risk for them. Your FICO score gives lenders an insight into what type of borrower you are solely because of your credit history. Because of the shift in the economy, most home buyers should have scores in the range of 740 or higher to get a satisfactory interest rate. You'll still qualify for a mortgage loan with a lower score, but the interest accrued over the life of the loan could be more than double the amount of someone having a better credit score.
Getting your credit in order is the first step in buying a home. Call us at (919) 924-4991 and we can help you get on the right track to the home of your dreams.
You want a stronger score, but how do you get there? Building your FICO score takes time. It can be difficult to make a significant change in your credit score with quick fixes, but your score can improve in a year by keeping tabs your credit report and by using credit extended to you to raise your score, instead of ruin it. The most important thing is to know your FICO score. You'll improve your credit score by using these helpful hints:
- Correct your credit report. If you discover incorrect items on your credit report, write to the bureau requesting that the item be removed. If you have a common name or the same name as a family member, you'll want to give extra care to make sure the activity reported is correct.
- Spread your debt around. At first, this doesn't sound like a good idea. But, you don't want to have one card that is maxed out and have the rest of your cards at a zero balance. It's better to have each of your cards at a smaller balance than to have the majority of your debt taking up the balance a single card.
- Apply for service station cards or chain store credit. For those who have non-existent credit or low credit, department store credit cards and gas credit cards are ways to start your credit history, increase your credit limits and keep up your payments, which will raise your FICO score. You must always avoid charging a high balance for too long because these types of cards normally have a steeper interest rate.
- Keep your cards in rotation. Whether you have older cards, or are just getting started with credit, use your cards to make sure your accounts stay active. But, pay them off in no more than two or three payments.
- Pay on time. Delinquent payments instantly lower your credit score. It's where people who have recently experienced job loss see the biggest dip in their credit score. Yes, it takes longer to build up your credit with payment history, but it's the most reliable way to show that you're able to make payments to a lender.
Now that you know more about credit reporting, you'll be able to successfully take the first step in owning a home, and that is improving your FICO score. Keep in mind that when it's time to apply for a loan to purchase a house, you'll want to keep your applications within a two-week window to avoid adverse effects on your credit score. With the help of RE/MAX Performance, the loan process is sure to go more smoothly so you, too, can become a homeowner.
Learn more about FICO scores at myFICO.com, Fair Isaac's informational site and review your credit history for free at annualcreditreport.com. And, for a small payment, you can get your FICO score from each bureau on their websites: equifax.com, experian.com and transunion.com.