Repair Your Credit | New Homes Market Center

Major purchases that require financing like a home or a car are often dependent on your having good credit. Since 1980, the three main credit bureaus – Experian, Transunion and Equifax, have used a scoring method to rate the risk in lending to individuals. While there are many different types of scoring methods, the most common is the Fair Isaac and Company, generally referred to as FICO score. This scoring method awards points to individuals based on information the credit bureaus receives. After assigning points to the information, a calculation of the data reflects the credit score. This score indicates the level of risk a lender might take when loaning out the money. A credit score ranges from 300-900. The higher your credit score, the more likely you are to receive a favorable interest rate because the lender sees a lower risk of you defaulting on your loan.

Credit Score Calculation

Payment History: The credit bureaus bases 35 percent of the credit score on paying bills on time. Are you late on your bills? Once you are 30 days late, it begins affecting your credit score and as time goes on, the severity gets worse. Not only does the total number of days late affect your score, but the total number of past due items also affects your score. Further, bankruptcy, consumer credit counseling, lawsuits, collection items, public records, unpaid medical bills, etc. may also adversely affect your credit score.

Amount on Credit Balance: The credit bureaus base another 30 percent of the score on how much outstanding debt you carry. Keeping multiple accounts with balances that are close to the limits affects your score negatively. A good rule of thumb is to keep your balances at 30 percent or less of their limits.

Length of Credit History: The credit bureaus base 15 percent of the score on the length of time between your first credit use and the present. The longer the period with a good payment history, the better your score is most likely to be.

New Credit: The number of inquiries on your credit report makes up another 10 percent of your credit score. The more you shop around for financing and the more institutions that check your credit, the larger the negative impact on your credit score. However, if you are shopping for a mortgage or a car, the bureaus allow a 14-day window where multiple inquiries from similar lenders will only count as one inquiry. In addition, if you continue to switch credit cards in order to benefit from low interest rate promotions, it may decrease your score. Try to keep a long-term relationship with some of your creditors.

Type of Credit Used: The bureaus base the last 10 percent of your credit score on the type of credit you receive. Whether you have retail accounts, credit cards, installment loans like car loans, or mortgages, it is the presence and recent information for these accounts or a mixture of these accounts within your credit that can affect your score negatively or positively. Certain furniture store and other retail programs that offer zero down and no payment for a certain amount of time may have a negative impact on your score. If you are thinking about purchasing a home, you may want to apply for this type of purchase after you securing your house. Be sure to talk with your lender before making such purchases.

Repairing Credit and Improving Credit Scores

First, you need to see what your credit history looks like. Checking your own credit with one of the three credit bureaus mentioned above will not count against you as an inquiry.

How to Check Your Credit Report

Anytime a lender denies you credit, you have a certain amount of time to request a free copy of your credit report. Take advantage of this opportunity to review your credit. You can also pay around $30-$40 to pull your own credit at any time. Make sure that you purchase a tri-merge report, which is a report from all three credit bureaus. It is usually the most expensive, but it will give you the full credit reporting information that mortgage lenders use when qualifying you for a loan. When ordering your own credit report online, be careful to read the fine print in its entirety, and make sure you are not signing up for additional services you do not need. Ignore any advertising that offers a free credit report. This will not give you what you need to understand your credit.

TIP: If you have had a bankruptcy in the last seven years or have worked with a credit counselor, it does not automatically mean you will not be able to get a loan. Review your situation with your lender.

Understanding Your Credit Score

Once you know your credit scores, can reference your payment history, and can open accounts, you can determine what steps to take to improve your credit. If your credit scores are above 720, congratulations, you have an excellent credit history. If your credit scores range from 620-699, your credit is good, and you may qualify for better interest rates but you should still look for ways to improve. If your scores are below 620, begin working toward improving your credit with your lender today. Do not be discouraged if your credit scores are lower than 620 because it does not mean you will not qualify for a new home. Talk with you new home specialist and they can recommend a lender that can work with your situation.

Improving Your Credit

There are three primary areas to focus on when improving your credit. First, focus on late payments. If you have current overdue payments, call that company and ask to arrange a schedule to help get you up to date. BEWARE of credit counseling services; they can affect your credit as negatively as a bankruptcy. Try to work out payment schedules on your own. Some companies will agree to stop charging you interest or even lower the amount you have left to pay off. Agreeing to either of these may have a negative impact on your score, but depending on your situation, it might be better for you in the end.

Second, try to maintain long-term relationships with the companies with whom you have credit – the longer your credit history the better. Do not continue to switch credit cards. Work with companies you like and try to keep the balances on those cards less than 65 percent of the total limit. Do not have too many accounts open at one time; too many sources of credit can also have an adverse affect on your credit score.

Third, create a budget and commit to stick to it. This is the best way to help you manage your bills and pay off debt. To start paying off large debt, first determine how much money you need each month for essentials – rent, food, all the minimum amounts due on accounts and other monthly bills. Then settle on an amount you can spare to apply as an extra payment to the bill with the lowest balance. Continue to pay the minimums on your other accounts, but each month take that extra payment plus the minimum payment due toward the selected bill and continue this process until there is no balance on the account. Next, take what was the minimum payment on the bill you just paid, plus the agreed extra, plus the minimum of the bill that has the next lowest balance and apply the money to that bill until it is paid off and so on for each account.

You will pay your debt down more quickly when you have a manageable plan in place. The stress of reducing your debt will also be less if you look at it as “one bill at a time” rather than trying to pay everything off all at once.

TIP: Understanding how to protect yourself and how to structure your credit will allow you to receive better interest rates and, in turn, pay less for the items you purchase through financing.

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