THE IMPORTANCE OF CREDIT SCORES
Your credit score is very vital since it is a picture of your financial status. The higher the credit score, the more credit worthy. A good credit score is needed not only from getting credit card limits, renting an apartment or buying a home. In the United States the average credit score is 692. Accredited credit bureaus calculate your score and are mandated to provide a Credit Report if you request for such document.
How a credit score is calculated
A credit score, also known as FICO® (Fair Isaac Corporation) score, is computed from different components of a person’s credit data. Data is grouped into categories and given certain percentages according to the most important category as shown below.
The percentage for each category is based on the general population. There are cases when particular groups may have different levels of importance. An example – people who have not been using credit for some time may have a different set of percentage.
In summary, the different factors for a credit score:
- Payment History (35%)
Creditors would like to know if you are a good risk. They will look at your past credit record and see if you pay on time. This is the most important category for the credit score.
- Amounts Owed (30%)
This would show how much you still owe from other creditors and if you can still pay them including the credit you are applying for. Too many amounts due can cause overextension and problems.
- Length of Credit History (15%)
The credit score takes into account:
- How much time your credit accounts have been established. This includes the oldest to your newest credit account and the average age of each account.
- How long certain credit accounts have been established
- When was the last time you used the accounts.
- Credit Mix in Use (10%)
Take into account all types of credit that you have to include retail accounts, credit cards, instalment plans, mortgage payments, and others.
- New Credit (10%)
It has been proven that credit made over such a short period of time can be risky especially for those who do not have a long credit history.
Your Annual Credit Report
The importance of a credit score cannot be ignored but it is equally important to have an Annual Credit Report not only for documentation but also to find out where and if you made mistakes in the past.
There are three (3) nationwide credit reporting companies that are accredited by the Federal government to provide FREE credit report every 12 months if you
Improvement of Credit Scores
Bad credit scores can have remedies. However, this takes time and a bit of effort. There are many “band-aid” fixes that people say they can do but this is likely to cause harm and damage you more in the long run. Thus, be careful of any advice that offers quick and easy remedies.
When you want to improve your credit score, the best way to do it is to manage the problem over a certain period of time. You need to repair your credit history first before you see an improvement on your credit score.
Here are tips to help you on your credit score:
- Request for a free credit report and check your credit score. Check the report for any errors or miss outs. Be sure to check against your records for any late payments that may have incorrectly place, the amounts due and other pertinent data that could have affected the credit score when it was calculated. If there are errors then dispute this with the credit bureau and set the record straight.
How to dispute error in a credit report
Get in touch or write to the provider of the information explaining why you are disputing the information given to the credit bureau. Include pertinent documents that can prove payment of account. Request the provider to give you a copy of the corrections. This correction phase will take 30-90 days.
In some states, the credit bureau will automatically provide the amended credit report. You can request again once the changes or deletions have been made.
- Be sure to pay what you owe in time. The biggest factor on your credit report is the credit payment history.
Set up a credit payment reminder system. It is customary for banks and other creditors with online capability to send you reminders through email or text. There are facilities that allow automatic transfer of funds. In this manner, you will not miss a payment.
Paying any creditor with the minimum requirement is not a good show of money management. In order to have a good credit report, you have to pay in full and close the credit.
- Do not have over credit. Though this is a tall order for some, it is highly possible. Reduce what you owe and this will be very vital for your credit score and would look good on your credit report.
When possible, pay in cash. Stop using your credit cards to pay for what you can pay in cash. Check the balances for each card and determine if you can pay some in full.
HOME FINANCING AND CREDIT SCORES
By now, you may have realized that your credit score is one of the most influential factors for you to get home financing. The higher the credit score value, the more likely you will get approval.
Apart from getting approval, your credit score also affects the interest rates on mortgages. Creditors provide low interest rates for those with high credit scores.
- Those with 740 credit scores or higher qualify for low or the best interest rates from creditors.
- Those with 620 may find it difficult to get mortgage.
- The disparity between the best and worst interest rates can be between a full percentage point and a half.
What do you need for home financing?
The decision to buy a home has been made. The very next step is to do research on the requirements – find out how much home loan and if you can handle the amortization monthly. There are certain documents needed. Find out where to get the best home financing offers that you can afford.
Create a Checklist
Whether you are a first-timer or have gone through the mortgage process, it is always important to have a guide. The best way is to create a checklist as there are miss-outs and details that tend to be forgotten.
Income verification and identification documents
Full name, SSS verification, birthdate
– Current address, email address, for residential addresses
– Income sources (primary and secondary)
– Government-issued ID
– Current employer, years of service, former employers, years of service, addresses
– Values of asset accounts – bank, investment, retirement, others
– Monthly debt obligations
– Address of the property needed home financing, year built, estimated value, and down payment amount and purchase price.
– Estimated value of insurance, property taxes and other costs
Credit verification
– Most recent Credit Report
– Source of funds for any large deposits,etc.
– Judicial decree or any court action for each obligation that is due
– Bankruptcy or discharge papers
– History of utility payments, phone, TV/cable, and other monthly expenses
Income verification for self-employed
– Federal tax returns (personal and business) for the past three years
– Profit and Loss Statements
– List of all business debts
Income and tax documents
– IRS Form 4506-T – request for tax transcript, signed and dated
– Payroll stubs for past month
– Federal Tax Returns for the past two years
– Most recent Asset/Bank Statements
– Written explanation if employed less than two years or employment gap exists within the last two years
Other information requested
– Homeowner’s Insurance including name of agent and contact telephone number and address
– Purchase Contract signed by all concerned
How much home financing can I get?
There are some factors in order to estimate how much home financing you can get. This depends on your income, the down payment that you have and the other existing debts.