First-Time Buyer's Guide to Better Credit
Choosing a lender isn't the first step in becoming a homeowner. In reality, the home buying process starts with your finances. Without an above average credit score, buying a house is more difficult and, you could find yourself renting for another couple of years in Sherman Oaks, California until your FICO score is acceptable.
A FICO score is a review of your years of credit history based on an instrument developed by Fair Isaac and Company. Most people traditionally have a score of 650, but scores range from 300 to 850. With the change in the economy, however, some people have seen their score lowered as a result of unemployment, closed credit card accounts, or credit card accounts that were closed because they don't carry a balance. Some of the factors in calculating your FICO score are:
- Credit to Debt Ratio — How much do you owe versus how much credit you have available?
- Credit Inquiries — How many times has your credit history been accessed by someone other than you?
- Types of Credit — Do you have a healthy mix of credit cards and loans?
- Payment History — How many late payments have you made?
In reviewing your credit history, you'll see that you actually have three reports. Experian, Equifax and TransUnion — three of the major credit reporting agencies — use a slightly different systems to calculate your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. You have a credit score with all of the bureaus.
When you apply for a mortgage or any other loan, lenders want to make sure that extending a loan to you isn't a problem. Your credit score gives lenders a view of what type of borrower you'll be solely because of your credit history. You'll need a score of at least 700 to get a satisfactory interest rate. If your score is less than that, you can still qualify for a loan, but the interest accrued over time could be more than double that of an individual with a better credit score.
Staying on top of your FICO score is the best way to ease into owning a home. Call us at (818) 269-1966 and we can help you get on the right track to the home of your dreams.
There are ways to improve your score. Building your FICO score takes time. It can be difficult to make a significant change in your number with quick fixes, but your score can improve in a few years by keeping tabs your credit report and by using credit extended to you to raise your score, instead of ruin it. The best way to do this is to know your FICO score. You'll improve your credit score by using these tips:
- Even out your debt. At first, this doesn't seem like a good idea. But, you want to avoid of having 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 about 20% of their credit limit than to have the most of your debt transferred to one card.
- Apply for gas station cards or department store credit. For those who have no credit or low credit, store credit cards and gas credit cards are ways to get credit, increase your credit limits and have a solid payment history, which will raise your credit. You must always beware of carrying a high balance for more than a couple of billing cycles because these types of cards normally have a higher interest rate.
- Use your credit. Whether you're just getting started with credit, or if you've got older cards, 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 drastically drop your credit score. It's where people who have recently been unemployed see the biggest dip in their credit score. Yes, it takes longer to rebuild your credit with payment history, but it's the most reliable way to show that you're able to make payments to a lender.
- Ensure that your credit history is correct. If you find incorrect items on your credit report, write to the bureau asking that the item be removed. If you have a common name or the same name as a family member, you'll want to pay extra attention to make sure the activity reported is correct.
Now that you're more informed about credit reporting, you'll be able to successfully take the first steps to homeownership, and that is improving your FICO score. Keep in mind that when you're ready to apply for a loan to purchase a home, you'll want to keep your lender applications within a two-week window to avoid a negative mark on your credit score. With the help of Charise Michell, Estate Agent, Wish Sotheby’s International Realty, CalBRE#01425090, shopping for a mortgage can be a stress-free experience 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.