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Credit Matters

Learn Your FICO Score--Or Clean It Up--Before Purchasing a Home

Working with a professional Realtor is an important factor in the home buying experience.  However, one of the first steps in the house-hunting process is getting your financial house in order.  That means obtaining your credit score and polishing it if it’s lackluster.  The payoff of doing this could potentially be huge: an affordable mortgage rate or one that leaves you financially stretched each month.  The key to securing a mortgage with an attractive interest rate is your FICO score.

What Is a FICO Score?

FICO scoring is a measurement of credit worthiness created by the Fair Isaac Corporation in 1989.  A FICO score is a numeric ranking typically between 300 and 850 calculated from an individual’s credit report and history.  Many lenders use FICO scoring to determine how creditworthy a potential borrower is and base their decisions on it.  FICO scoring is used for home mortgage, auto-mobile loans credit cards.  The higher your FICO score, the lower your interest rate.  Knowing your credit FICO score before you start shopping for a home must.

How Your FICO Score Is Calculated

FICO scores are issued by three national credit-reporting agencies: Equifax, TransUnion and Experian.  FICO scores may vary from each agency.  According to Fair Isaac, the median FICO score in the is 723.  E-LOAN, a large online lender, uses these rankings.  FICO scores above 730 are excellent, 700-729 ranks are good, 670-699 means increased lender scrutiny, 585-699 makes a higher risk and below 585 causes limited credit options.

What Goes Into Calculating a FICO Score?

Five weight factors equal a total FICO score.  Fair Isaac breaks it down like this: 1) payment history-35 percent, 2) amounts owed-30 percent, 3)  length of credit history-15 percent, 4) new credit-10 percent, and, 5) types of credit in use-10 percent.

FICO Scores and Loan Rates

An excellent FICO score can save you hundreds of dollars in your monthly mortgage payment.  Consider the numbers: A FICO score of 720-850 might get you an interest rate of 5.77 percent, yielding a monthly payment of $877 on a $150,000, 30-year fixed-rate mortgage.  Reduce that score to between 620 and 674 and the interest rate reaches 7.58 percent with a $1,057 monthly payment.

How to Obtain Your FICO Score

An annual free credit report can be obtained by going to https://www.annualcreditreport.com/cra/index.jsp.  For a nominal fee extra copies of credit reports, including FICO scores, can be obtained from the following sources:  Equifax http://www.equifax.com/ at (800) 685-1111; TransUnion http://www.transunion.com/ at (800) 888-4213; or Experian http://www.experian.com/ at (888) 397-3742.  You can also order any of the three credit agency reports from Fair Isaac http://www.myfico.com/.

How to Improve Your FICO Score

Check your credit report for accuracy.  Mistakes regarding late or missed payments on existing credit cards are common.  Too many credit inquiries may adversely affect your FICO score.  Formally cancel (hard close) accounts you no longer use.  Even a zero balance can count against you.

You may be able to “clean up” your credit report, which could improve your FICO score.  Contact the credit reporting agency you got your report from.  If there is a mistake, ask what documentation is needed to change it.  Paying off existing balances may also help to improve your credit score.  Depending on individual credit cycles, it may take as long as 30 days to update your credit report.  There are a variety of online services and software products available to assist in reviewing your credit and improving your FICO score.  You’ll find information about these at http://www.myfico.com/.  Credit awareness counts.

(Source: California Real Estate Magazine, September 2005, Ellen Paris) 


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