Although the terms of a home loan are determined by more than just your credit score, it is one element you should pay attention to and work to optimize before buying a home. I often get asked, what is a credit score and how does it impact me?
What is a Credit Score?
There are three main credit reporting agencies, also known as credit bureaus, TransUnion, Experian and Equifax. They collect data regarding your past and current credit and debt. They then resell it to businesses such as financial institutions which they use it to evaluate your ability to repay a loan. All three of these bureaus which are publicly traded and for profit, use a scoring model known as Fair Isaac Corporation or FICO!! This scoring model us used by 90% of the 100 leading financial institutions for their risk assessment.
What Factors Affect My FICO Score?
- 35% is based on your payment history for all accounts.
- 30% is based on the amount you owe.
- 15% is based on how long you have been using credit.
- 10% is based on applications for new credit.
- 10% based on types of credit used. Your credit mix.
In order to receive a FICO score you need a minimum of one open account for at least six months. Scores range from 300 to 850!! According to FICO.com, the average FICO score is 706 as of September 2019. While you can buy a home with lower scores, you generally want to be as high as possible to get the best loan terms/options. Interestingly, FICO have released their new scoring system called FICO 10 in 2020 but most lenders are still using the FICO 8 model which is our focus.
How Can I Improve My FICO Score?
- Bring active past due accounts current.
- Keep credit card balances low (say at least 25% below limits).
- Request correction letters for any reporting errors.
- Consider keeping accounts open rather than closing them (closing accounts may lower your credit score).
- Limit applications for new revolving debt (credit cards, department store cards…).
Where Can I See My Credit Report or FICO Score?
Too quickly see your credit score, most banks and credit card companies now offer this with a click of a button. However, this is not your credit report. You are entitled to request a free copy of your credit report from each of the bureaus once every 12 months. Of course, you can also pay for a copy.
Feel free to reach out, with any questions or if you would like to chat more about what is a credit score or about getting prepared to buy a home.
