How do I improve my credit score?

According to a recent New York Times article and a report by the Federal Reserve, a majority of banks are less likely to offer loans to people with a FICO score of 620 and a 10 percent down payment than they were in 2006.  Lenders were also less likely to do so even for those with a score of 720.  Improving your credit scores not only helps increase your chance of loan approval but also  will provide you more opportunities to reduce your interest rate. The good news though is there are some tactics that consumers can employ to raise their scores.

  • First, it is worth noting that median credit scores are rising, as people reduce debt and spend less in tight economic times.  Some 18% of Americans now have scores of 800 to 850, while 15 % are below 550, according to FICO data.
  • Often lenders will review FICO scores from the three big credit agencies, and they use the middle number to evaluate the borrower.  That number becomes the borrower’s “risk number.”
  • Borrowers can figure out their risk number by obtaining their three credit reports, available free once a year at AnnualCreditReport.com, and studying them carefully for errors or omissions.
  • According to FICO, the two biggest factors in a credit score are payment history, which accounts for 35 percent of the score, and the amounts owed, accounting for 30 percent.
  • Knowing that information, one can raise his/her credit score by reducing balances on credit cards.  However, if an account is in collection, it is too late to improve the credit score by paying it off.  The notation that an account is in collection is what lowers the score, so consumers may get more mileage by paying down active credit-card balances and other debts first.
  • Though mistakes and bankruptcies may stay on a credit report for seven years, lenders will generally be more likely to overlook late payments that happened two or more years ago than more recent ones.
  • Improving one’s credit score could take three to four months, or it could take as long as 18 months.

If you have experienced a short sale, foreclosure, or bankruptcy it is important to know how the event impacted your score and your lenders view of when you can finance on another home.  Each lender and loan product has different time requirements regarding when they  will finance a borrower with previous home mortgage default issues.  If you would like more information or have specific questions about how to improve your credit score so you can purchase a home contact me.

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