Summary: A credit score is a key component that lenders assess when they decide whether or not to approve a mortgage applicant for a home loan. This article will explain what a good credit score is and what you can do to improve it if necessary.
As Childish Gambino sings, “We just want the money, money just for you.” This is America! It’s the land of money, of opportunity and homeownership……IF you have a good credit score. The question is, what is considered a good credit score? And how do you improve it if it needs a boost?
What is a Credit Score?
Your “score” is calculated by 3 separate credit reporting agencies, and tracked via your individual social security number. Any time you open an account, such as a cell phone contract, utility bill, credit card or loan, the creditor sends your account information to each and every credit bureau. Bureau reports are updated monthly, and they reflect your account balance, credit limit with each account, number of open lines of credit, and timely or delinquent payments.
Those factors, combined with your income, determine your “creditworthiness.” Creditworthiness, what every potential Seattle home buyer needs, is reflected as a number or credit score. The higher the credit score, the “better” your creditworthiness. This number, also known as FICO score, is based on a data analytics program developed in 1956 to measure consumer credit risk.
The three major credit reporting agencies are Equifax, Experian & Transunion.
In a perfect world, the reports should be identical. However, the bureaus do not compare notes. The systems are not perfect, and should be monitored regularly. Any errors can be disputed. If you notice a discrepancy or error on a report, each bureau has an official method to dispute the errors. Disputes must be done in writing, and most can be done online. Do not despair, once an official dispute is filed, the bureau must respond within 30 days.
What is a Good Credit Score?
A credit score falls on a spectrum ranging between 300 and 850 with a good score being over 720. Most Seattle mortgage lenders require a minimum credit score of 620 as a major factor in their loan approval process and a 740 credit score to get the best rates on a conventional loan.
Scores over 760 can get you the lowest mortgage insurance premiums and best rates on most Jumbo Loans. The credit card companies and other companies’ minimum required score vary. Your credit score is not static. It can change from month to month, based on the aforementioned factors.
How Do I Improve My Credit Score?
- If you need to establish credit open a credit card a make small charges each month. Make sure you pay off your entire balance every month to avoid interest charges. Your payment history will start to build making you a better credit risk for a lender.
- Keep your social security number private. Avoid opening lines of credit “as a favor” to a friend or family member. Ultimately, if they default on these payments, you will be personally responsible to pay.
- Make your payments on time and send more than the minimum required payment. Use your online banking bill payment tool to make the process easier, and to track your payment history.
- Maintain your credit balance as close to zero as possible. Be aware that the higher your balance in relation to your credit limit the more your scores will drop.
- Check your credit score only when absolutely necessary. Every time you pull your credit report it will reflect negatively in your score.
- Enroll in a secure credit monitoring program like CreditKarma.com. These programs are free, and will monitor your credit report without affecting your score. You will be notified immediately of any changes, new credit inquiries, lower interest credit cards available to you, and unique insights to improve your overall creditworthiness.
- Use your credit cards regularly, but pay them off monthly. Unused or “phantom” credit cards will actually decrease your score. Charge a tank of gas each month, or make some other small purchase, then pay off the card completely.
- Choose credit cards or automobile loans with the lowest interest rate possible.
- Set yourself a monthly budget that includes your necessities such as housing and food, credit card payments, and a regular savings plan.
- Communicate with your creditors. Many Americans are plagued with multiple uncovered medical bills, even though they maintain costly medical insurance. Generally, medical will not be reported to credit bureaus unless they go unpaid for months. Most medical offices will accept a monthly payment in exchange for not reporting a delinquency. Surprisingly, even a small, regular payment is acceptable to most medical offices. If you experience financial hardship, absolutely the worst thing you can do is ignore your bills. Most people do not know that many banks have temporary hardship programs that will assist you until you get back on track.
- Do not forget that you can negotiate with creditors. Many times, medical bills or other collections can be resolved with a lump sum payment of less than the amount you owe. For example, if you receive a bill from your dentist indicating you owe $250.00, ask them if they will accept a one-time payment of $150.00 to close out your bill. CAUTION if this bill has already been reported to a credit bureau, and you settle for a lower amount, your credit report will reflect that the balance is zero, but that you paid less than you owe. Be sure to include this factor in your negotiations, so that your report reflects payment in full.
- Be sure to avoid credit consolidation companies, or other credit repair companies that charge you money.
Any change to your credit report (increase or decrease) will take at least 30 days. Cleaning off inconsistencies and paying down higher balances well in advance of home shopping is to your benefit. The credit rating that you have is cumulative over your lifetime. Get your approval through our local Seattle online mortgage lender, Sammamish Mortgage. Follow our simple steps to secure yourself the opportunity to build a great credit score. Then you can achieve that American dream of home ownership. Then you can sing with Childish Gambino, “look at how I’m livin’ now!”
Need a Mortgage to Finance a Home Purchase?
If you’re in need of a mortgage, Sammamish Mortgage can help. We are a local mortgage company serving the Pacific Northwest region including Washington, Idaho, Colorado, and Oregon. We have been providing several mortgage programs with flexible qualification criteria to borrowers since 1992. Please contact us if you have any questions or are ready to apply for a mortgage.