In the world of home lending, there’s almost nothing quite as important as your credit score. Your three-digit score, as much as any other part of your application, determines whether you will be allowed to borrow the money you need to buy your house. And if that score is below average, if you are approved, you can expect to pay a higher rate.
Last week we talked about the five elements that are considered in your credit score. They are: payment record, length of credit history, credit utilization, recent credit requests and keeping a healthy mix of credit types.
Here are some common questions about credit scoring:
Q: What is a credit score?
A: Without getting into the science behind the number, a credit score is a computer-generated three-digit representation of your creditworthiness.
Q: What is it used for?
A: It is used to help credit grantors evaluate the likelihood that you'll repay what you have borrowed on a timely basis.
Q: Why do lenders use credit scoring?
A: There are three primary reasons:
● A credit score is a fair way to measure risk when considering an application for the extension of credit. The scoring model specifically ignores race, place of national origin, religion, sex and marital status. Thus it eliminates bias which is illegal under federal laws.
● Credit scoring has been shown to be very predictive of future behavior, and that alone makes it an extremely valuable tool for credit grantors.
● Lenders can obtain credit scores inexpensively and almost instantaneously. Because they rely solely on information contained in your credit report, they are simply an analysis of information that is assembled already.
Q: What are the easiest ways to improve my credit score?
A: Pay bills on time without exception, and keep revolving balances such as credit cards well below 50 percent of your credit limit with that issuer. These factors account for almost two-thirds of your overall score.
Q: What will hurt my credit score the most?
A: Bankruptcy, foreclosure, charge-offs and recorded debt judgments.
Q: I saw an ad for credit repair. Will that work?
A: Typically, credit repair is an attempt to manipulate the information in your credit report in order to artificially inflate your credit score. I do not recommend this course of action.
Q: Can I see my score for free?
A: No, but remember that your score is calculated based solely on information contained in your personal credit history. These are maintained by the three national agencies: Equifax, Experian and TransUnion. By monitoring these reports at AnnualCreditReport.com for derogatory information, you can make sure your credit report is producing a good score. You can obtain one free copy annually of each of your three credit reports.
John Adams is a broker and investor. He answers real estate questions on radio station WGKA-AM (920) every Saturday at noon. For more real estate information or to comment, visit www.money99.com.
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