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How To Increase A Credit Score
Document Transcript
1. FICO Credit Scores and Increasing Your Creditworthiness
massrealestatenews.com/f ico-credit-scores-and-increasing-your-
creditworthiness/ How to Increase a Credit Score Credit scores are one of the
largest f actors that lenders use in evaluating whether or not to lend money to a
borrower. Credit scores are designed to measure the risk of someone def aulting
by taking into account various f actors in a person’s f inancial history. If you are
considering purchasing a Massachusetts home one of the things you want to be
sure of is the accuracy of your credit report. The economic down turn of the last
f ive years has vastly changed the mortgage landscape all across the country. If
you ask any mortgage broker they will tell you that things have changed in the
mortgage industry on a monthly basis. Given the increase in f oreclosures and
short sales lenders have increased their standards when evaluating the potential
f or def ault of every borrower. One of the tools that lenders use to evaluate the
borrower to repay a loan is what’s know as their FICO score. The FICO score
was developed by the Fair Issac Corporation. The company was f ounded in
1956 and their scoring programs are of ten used to assist lenders in managing
credit accounts, detecting credit f raud and automating lending decisions. The
FICO score is a standardized approach that helps lenders deliver decisions on
loans in an ef f icient manner. FICO scores can range f rom 300 to 850 with 850
being the maximum possible score. According to the FICO scoring system there
are f ive f actors that determine a borrowers score. Using these guidelines can
help you improve a credit score! 35% — A borrowers payment history carries
the most weight – Late payments on bills including a mortgage, credit card or
automobile loan, can cause a consumer’s FICO score to go down. Paying your
bills according to the contract you signed will over time help improve a
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7. consumer’s FICO score. 30% — The borrowers credit utilization – The ratio of
current outstanding debts such as credit card balances to the total available
revolving credit ( your credit limit). You can improve your FICO score by
paying of f debts and lowering your utilization ratio. The closing of existing
revolving accounts will typically adversely af f ect this ratio and theref ore have
a negative impact on your FICO score. 15% — The length of credit history – As
your credit history gets longer, assuming you pay your bills on time, it can have
a positive impact on your FICO score. 10% — The types of credit used
(installment, revolving, or consumer finance) – There is some credit given to
having a history of managing dif f erent types of credit. 10% — A recent search
for credit or amount of credit obtained recently - If you have multiple credit
inquiries as a consumer seeking to open new credit, such as credit cards, retail
store accounts, or personal loans, it can hurt an your score. Applying f or lots of
new credit in a short period of time is also viewed as risky and can cause a drop
in an individual’s score. What should be noted however is that if you are
shopping f or a mortgage or auto loan over a short period of time you should not
experience a decrease in your scores as a result of these types of inquiries. So if
you are buying a home and apply to multiple lenders and they all do their credit
checks you are not supposed to be penalized.
2. FICO scores do not take into account a borrowers salary, employment
history, where they work, rental agreements, child support or other such
obligations or interest rates on any current loans. Generally speaking a credit
score that is over 720 is of ten considered an excellent credit score. A score of
680– 719 is considered good. A score that f alls between the range of 620-679
will usually make the lender scrutinize the f ile f urther. Having a score that f
alls between 585-619 will typically disqualif y you f rom getting the best rates.
A score below 584 will make many lenders question whether or not they want
to do business with you. There are actually three companies that report credit
scores to lenders. They are Equif ax, Experion and Transunion. The scoring of
these agencies can of ten vary quite a bit. Each of the bureaus collects dif f erent
inf ormation on the borrowers which can change the f inal score. Given how the
credit scores can dif f er f rom the various agencies if you are f alling on the
edge of one of the credit ranges it may be prudent to apply to more than one
lender. For example if you had a score of 675 at one agency it is quite possible
you could be 700 somewhere else which could give you a better rate! It should
be noted that the credit scoring model was slightly altered in 2009 and could ef
f ect your score either up or down by 20 points. In the new model credit
problems and issues will be ranked according to number and magnitude more
specif ically than bef ore. The new FICO scoring system also f ocuses less on
how many accounts a borrower has and more on the amount of balances carried.
The statistical models that are used f or generating credit scores are subject to f
ederal regulation. The Federal Reserve Board’s Regulation B (implementing the
Equal Credit Opportunity Act), expressly prohibits a credit- scoring model
considering “prohibited biases” such as race, national origin, sex, religion and
marital status. The law also states that credit-scoring models must be empirical
and statistically sound. In addition, if a borrower is denied a loan based on
credit, the lender must state to the specif ic reasons f or the denial. A statement
that the person did not score high enough is not acceptable. Thee reasons f or
denial must be specif ic. For example there were too many late payments of 60
days or longer. So how does one go about improving their credit score to get the
best rates that lenders offer? The answers are actually pretty simple! Pay all of
your bills on time every month. Pay of f all of your existing debt. Unused credit
cards should not be closed. This can sometimes lower your credit score. Do not
open a bunch of new credit card accounts in a short period of time. A f ew years
ago it was not uncommon to hear of mortgage brokers or credit repair
companies doing what was known as “doctoring” a persons credit. A major
portion of the FICO credit score is set by the ratio of credit used to credit limit.
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