The dread Credit Beeste lurks around all of us at some point, and at no point is the issue more critical then when buying a home. There are three principal credit services: Experian, Equifax and TransUnion. All of them issue reports with detailed credit histories, and a credit scorecalled a FICO score, after the software company that conceived the formula: Fair Isaac and Company. Thanks to recent federal legislation, each credit agency is required to provide every consumer that requests it a free copy of his or her credit report, once a year.
Credit Scores Matter
FICO scores can make a substantial difference in the interest rate that a mortgage lender may be willing to offer you. The table below illustrates a FICO range and corresponding interest rates, taken from a website specializing in FICO information:
FICO Score APR
720-850 6.699 %
700-719 6.824 %
675-699 7.362 %
620-674 8.512 %
560-619 10.083 %
500-559 11.255 %
According to the same site, fifty eight percent of the national population has a FICO score of 700 or above. For the rest of us, credit scores may play a role in running up the interest rate on a mortgage quote or on the issue of mortgage eligibility, depending on what mix of data your lender uses to make decisions.
Understanding Credit Scores
How important is your credit score? It's not something to monitor constantly, if you keep paying your credit card bills. If you're entering the mortgage market with a less than desirable credit rating, it's important to know about it and to be familiar with the details that brought your rating down. Some glitches in credit ratings are, to a certain degree, overlooked by potential lenders. Temporary problems that occurred during a divorce are often recognized as aberrations. Big medical bills that weren't covered by health insurance are another instance of a catastrophic occurrence that led to financial difficulty, rather than financial irresponsibility.
Optimizing your Credit Score
Credit reports can also be dead wrong, which is another reason to familiarize yourself with what the credit agencies have on record about you. A survey by the California Public Interest Research Group found that 25 percent of credit reports contained serious errors that could result in the denial of credit, such as false delinquencies or accounts that did not belong to the customer. It found that 54 percent of reports contained less serious errors. You can get errors and retired debts removed from your record. Each agency has its own procedure for doing so, but they are accustomed to the process. It usually requires a specific written request and, for the sake of diligence, a follow up phone call.
Know the Enemy
Familiarizing yourself with your credit histories and credit scores as proclaimed by the three agencies is worth the effort. Keep in mind that a credit score will not be, of itself, the reason that you are deemed acceptable or unacceptable as a credit risk. Every lender has multiple criteria for mortgage quotes, from property location to work history. But credit history is importanttoo important to be an unknown factor in your search for a mortgage loan. If you know the data, you can personalize the problem areas with explanations and if you examine the reports early enough, you can correct errors. |
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