Your FICO Score...
  What it really means and how your spending habits affect it!

Understanding Your FICO Score and How it Affects Home Buying

Home buyers who are seeking a mortgage find out early-on that their credit score plays an important part in the home buying process and in determining the interest rate that a lender offers.

What is a credit score?

A credit score is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan.

How are credit scores calculated?

Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't necessarily use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different.

Why are credit scores sometimes called FICO scores?

The software used to calculate a great number of credit scores was created by Fair Isaac Corporation--FICO.

Which parts of a credit history are most important?

The pie chart shows a breakdown of the approximate value that each aspect of your credit report adds to a credit score calculation. Use these percentages as a guide:

35% - Your Payment History
30% - Amounts You Owe
15% - Length of Your Credit History
10% - Types of Credit Used
10% - New Credit


   

Your Payment History Includes:

• Number of accounts paid as agreed

• Negative public records or collections

• Delinquent accounts:
  1. total number of past due items
     
  2. how long you've been past due
     
  3. how long it's been since you had a past due payment

What You Owe:

• How much you owe on accounts and the types of accounts with balances
  
• How much of your revolving credit lines you've used--looking for indications you are over-extended
  
• Amounts you owe on installment loan accounts vs. their original balances--to make sure you are you paying them down consistently
  
• Number of zero balance accounts

Length of Credit History:

• Total length of time tracked by your credit report
  
• Length of time since accounts were opened
  
• Time that's passed since the last activity
  
• The longer your (good) history, the better your scores

Types of Credit:

• Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
  
• A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards)

Your New Credit:

• Number of accounts you've recently opened and the proportion of new accounts to total accounts
  
• Number of recent credit inquiries
  
• The time that's passed since recent inquiries or newly-opened accounts
  
• If you've re-established a positive credit history after encountering payment problems
  
• In general, checking to make sure you aren't attempting to open numerous new accounts

Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren't included in the report, such as income, employment history and the type of credit you are seeking.

What's a Good Credit Score?

Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.

Borrowers with a credit score over 700 are typically offered more financing options and better interest rates, but don't be discouraged if your scores are lower, because there's a mortgage product for nearly everyone.

Multiple Credit Scores

Your bank will pull credit reports and scores from all three major credit reporting agencies: Transunion, Equifax and Experian. They'll probably use the middle score to work your loan application. Ask your lender to explain which credit scores will be used and how they affect your loan application.


Improving Your Credit Score

Improve Your Payment History

• Always pay your bills on time.
• If your situation is serious, see a legitimate, non profit credit counselor. Avoid the scam artists who promise a quick reversal of your credit problems.

Keep Debt to a Minimum

• Keep your credit card balances low. High debt-to-credit-limit ratios drive your scores down.

• Pay off debt, don't move it around. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved.

• Don't close unused accounts, because zero balance might help your score.

• Don't open new accounts that you don't need as a quickie approach to altering your debt-to-credit-limit ratios. That can lower your score

Length of Your Credit History

• Time is the only thing that can improve this aspect of your scores, but you can manage it wisely:
  • Don't open several new accounts in a short period, especially if your credit history is less than three years. Adding accounts too rapidly sends up a red flag that you might not be able to handle your credit responsibly
    

Manage New Credit Wisely

• Several credit inquiries during a short period means you are attempting to open multiple new accounts, and that lowers your credit scores.

• Credit scoring software usually recognizes when you are shopping for a single loan within a short period of time, such as a home loan. If multiple inquiries are necessary, have them pulled as closely together as possible.

• Checking your own credit report does not affect your scores.

• Do try to open a few new accounts if you've had credit problems in the past. Pay them on time and don't max out your credit limits

How to Correct Errors on a Credit Report

Increase Credit Scores by Correcting Credit Report Errors

You just discovered errors in one or more of your credit reports, or even worse, accurate references to late payments or other negative issues that lower your credit scores. Take a few deep breaths and try to stay calm, because credit report errors can be fixed. It's possible to remove many negative items, too--and without help from companies that promise to repair your credit.

How To Dispute Errors on Your Credit Report

1. Make a copy of your credit report and circle every item you believe is incorrect.

2. Write a letter to the reporting agency (the address will be printed on the report). Explain each dispute and request an investigation to resolve the issues. If you have supporting paperwork, send it along, coding pages to match dispute paragraphs. Do not send your originals.

3. Send all materials by certified mail, return receipt requested, so that you can prove the packet was received.

Send a similar letter of dispute to the creditor whose reporting statements you disagree with.

Refer to a billing statement to find the correct address for disputes, because it's usually different from the payment address.

If your dispute involves personal information, such as your current address, enclose a copy of your driver's license or a utility bill in your name to verify your residence.

The reporting agency will initiate an investigation, contacting your creditors to verify the accuracy of the information. If the creditor cannot verify that the entry is correct, it must be removed. When the investigation is complete, the agency must send you a free copy of your report if changes were made.

If the investigation uncovers an error, you have the right to ask that a corrected version of your credit report be sent to everyone who received the report during the past six months.

Tip:

Contact your creditor first, then allow a bit of lead time before you submit the dispute to the reporting agency. By the time the dispute is verified, the creditor will hopefully have corrected the error.

Online Disputes

You can initiate an investigation from many online credit reports by following the links provided and checking the disputed items as directed. There sometimes isn't a place for remarks--you'll simply check a multiple-choice reason for each dispute.

If Changes Aren't Made

If the credit reporting agency says the original information is accurate, it must provide you with a written notice that includes the name, address, and phone number of the person who made the report. If you still disagree, initiate a second investigation.

Unfortunately, in the real world the reporting agencies often try to sidestep that requirement, giving you standard, computer-generated information rather than the facts you need to find the person or department who made the negative report. Keep plugging away until you have the answer you're looking for.

If your attempts to correct an entry are unsuccessful, you can ask the reporting agency to insert a 100-character explanation next to it that explains your side of the story.

Sometimes You Hit a Dead End

I know from personal experience that it's sometimes difficult to have information changed, even if you can prove it is incorrect. A family member has not been able to have an incorrect employer notation corrected, even though he has not worked at the company for many years. The standard response from the credit reporting agency is that they would not have the information if he had not included it on an application for credit.

They refuse to remove the incorrect notation, even though he has provided them with a letter from his current employer and several W2s.

Why did that happen? Somoneone likely keyed-in a previous employer as a current employer. Sometimes you simply cannot get through to them that errors exist.

Negative Entries

Bankruptcies remain on your credit report for ten years, while other types of entries are generally reported for seven years. If an account that was previously past due has been brought current, and has been either paid off or kept current for at least a year, the creditor might agree to an early deletion of the past due references.

Write a letter to your creditor and request that the negative entries be removed. They'll often comply if they see you are up to date and handling your account in a positive way.

Another tactic you can use to clean up your credit report is to dispute a negative item even if you believe it is accurate, but you'll have to follow your conscience to decide if that's an ethical way to go.


Ready to check your Credit Score? Here are the 3 leading reporting agencies: