When it comes time to reach a major financial milestone like buying a home, the negative information on your credit report could interfere with your dreams. Fortunately, there are steps you can take to improve a poor credit score and work towards homeownership.
In this article, we will explore the process of repairing damaged credit. You’ll learn how long it takes to fix a credit score and how to fix a FICO credit score so that you are in a better position to buy a house.
What Is a Credit Score and How Is It Determined?
A credit score is a three-digit number that reflects the risk a potential borrower poses to lenders, including the likelihood of default. Everyone over 18 years old has a credit score, and lenders use it to determine whether someone is worthy of credit or how much they should be lent.
The score is a snapshot of a person’s financial habits, including whether they pay their credit card, auto loan, and other bills on time.
A consumer with a history of using credit responsibly and who pays their bills on time is unlikely to be deemed a credit risk. In this case, the borrower will probably not default on a loan.
On the other hand, a history of missed or late credit card payments will show up in someone’s credit score, warning lenders that this individual poses a higher risk of defaulting on a loan.
A credit score model is two-pronged.
First, VantageScore was formed in 2006 and competes with the second credit score calculation, FICO. Experian, Equifax, and TransUnion, the three major credit bureaus, created VantageScore.
FICO harnesses technology from the Fair Isaac Corporation (FICO) and is the one that lenders rely on for credit decisions most of the time.
The trio of aforementioned credit bureaus gathers financial data on consumers, including their payment history. That information then makes its way onto a credit report. Credit scoring modeling agencies VantageScore and FICO use their software technology to create a credit score.
Their algorithms are not set in stone and are always evolving, so the criteria used to determine a credit score also change.
Explaining Credit Score Ranges
Credit scores can range from 300 to 850. The higher the score, the more likely the borrower will make payments on time. Lower credit scores carry a higher risk that the borrower will be unable to repay a debt.
The credit score helps lenders determine the terms of a mortgage loan, including the amount, interest rate, and the applicant’s qualification status.
According to Experian, more than two-thirds of American consumers, or 67%, have at least a “good” FICO score. Most mortgage lenders rely on the standard FICO score when considering an applicant for a mortgage loan or refinancing.
Based on Experian’s system:
- A credit score of 800-850 is deemed excellent and exceptional. Someone with a credit score in the top range is likely to have the easiest time getting approved for a mortgage and will probably receive the most attractive terms.
- Meanwhile, a credit score between 740 to 799 is considered very good and will still result in better terms, including some of the best interest rates from mortgage lenders.
- Credit scores that fall in the range of 670 to 739 are still good and acceptable. While you could get approved for a mortgage with this status, you might not qualify for the top terms on your mortgage.
- A score in the 580 to 669 grouping is only fair and might not qualify potential borrowers for mainstream loans. Instead, they will likely fall into the sub-prime borrower category where interest rates on loans tend to be higher than usual.
- Credit scores at the bottom of the barrel, ranging from 300 to 579, are deemed poor. Lenders are likely to reject mortgage applications from consumers in this category.
Based on these parameters, if you are ready to take that next step toward homeownership, visit Total Mortgage’s online application today. Before you apply, get your free rate quote by answering a few simple questions.
4 Tips for Fixing Your Credit Score
While it may not happen overnight, fixing a bad credit score is possible. By implementing the right habits, experts suggest you could be well on your way to fixing your credit score in 30 days or less, though you will still need to be patient to move into a stronger credit rating category. In the most extreme cases, this could take as long as a year or two.
You could enlist the help of third parties to attempt to repair your damaged credit scores for a fee, there are also steps you could take on your own:
Step 1: Keep your credit utilization rate low
Your credit utilization rate reflects how close you are to reaching the spending limit on your credit cards. Divide a card’s outstanding balance by the credit limit, and then multiply it by 100 for a percentage.
The result is your credit utilization rate. Maintain a credit utilization rate of no more than 30% to prevent drops in your credit score. If your rate is too high, make additional payments on your credit cards to improve your credit snapshot to lenders.
Step 2: Make payments on time
Late or missed payments can drag you down and prevent you from having an exceptional credit score. Pay at least the minimum amount.
Step 3: Make sure you have a long credit history
Longer credit histories are viewed more positively than shorter ones. In fact, the duration of your credit history can comprise as much as 15% of your credit score. Do what you can to maintain relationships with lenders and keep accounts open.
Step 4: Don’t make new credit inquiries
Refrain from applying for more credit when you seek to get approved for a mortgage. Credit inquiries can harm your credit score in the short term, as more credit increases the risk that you will be unable to pay your bills. The credit length influence, which could account for up to 10% of your score, will weaken over time.
Your credit score is a critical component in the home buying process. It will determine whether or not you can be approved for a mortgage, and it can affect the cost of that loan over the next 15 or 30 years.
Find a mortgage expert at a Total Mortgage office near you and discuss your mortgage loan options today.
Filed Under: Uncategorized