April 24th, 2006 admin Posted in Uncategorized |
How credit scoring works & how you can improve it before applying for a mortgage.
The following entry was written by guest blogger Phil Caporusso.
Have you ever wondered how a lender decides whether or not to grant you a loan? For years, creditors have been using credit scoring systems to determine if you would be a good risk for credit cards and auto loans. More recently, credit scoring has been used as a tool by lenders to evaluate your ability to repay home mortgage loans. Here’s how credit scoring works…..
What is credit scoring?
Credit scoring is a system creditors use to help determine whether or not to grant you credit; and if so, under what terms the credit shall be offered. Information about you and your credit experiences (such as your bill-paying history, the number and types of accounts you have, late payments, collection actions, outstanding debt, the age of your accounts, etc.) is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A point system (your credit score) helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
Because the information contained in your credit report is the crucial component of any scoring system, it is extremely important to make sure the information in your credit report is accurate. To get copies of your report, you can contact the three major credit reporting agencies (Each agency may charge you a fee for issuing a copy of your report.):
*Equifax: (800) 685-1111
*Experian (formerly TRW): (888) 397-3742
*Trans Union: (800) 888-4213
Why is credit and credit scoring important?
The interest rate you are charged – whether for a credit card, a new car or a home – will be determined by your credit score. The higher your score, the lower the interest rate, and over the years that axiom can make a huge difference in the amount of money you will pay for the same loan. Just a few missed payments on a credit card can make a big difference over the life of your loan.
What can you do to improve your score?
If you are looking to buy a house or get a car loan, start a few months before to repair your credit. If you don’t have any credit, you must establish credit.
Pay your bills on time
Mortgage payment history is most important, followed by auto loans, then major credit cards, then store cards.
Pay down outstanding balances to below 30% of the limit
Scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, then that is likely to have a negative effect on your score. DO NOT transfer balances from a few cards onto one card and then close all those accounts. Ask your credit card company for a higher limit - so that with the same balance, you can be far below the limit. You Do Not want to be close to your maximum limit on your credit cards.
Do not take on any new debt
DO NOT close any existing accounts.
How long is your credit history?
Generally, models consider the length of your credit track record. An insufficient credit history may have a negative effect on your score. Also closing accounts with a long established history could reduce your score. DO NOT close any accounts.
Please note: it may take a month or two to significantly improve your credit score. If there are errors on your credit report, we can help you fix them or refer you to a credit repair company (NOT credit counseling—this is looked at the same as bankruptcy).
If you have any questions or need any further information about financing your home purchase, please contact me.
Phil Caporusso – Senior Loan Consultant
eHomeCredit Corp.
190 Motor Parkway, Hauppauge, NY 11788
631-656-3970
Email:
pcaporusso@ehomecredit.com
Related Links
How much can I afford?
Contact information for Mortgage Pre-approval
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