Chances are you’ve heard the term “credit score” before—every financial decision from applying for a credit card to getting a mortgage loan—is affected by your credit score. But what is a credit score exactly and why is it so important, especially for homeownership?
What is a credit score? Basically your credit score is a three-digit number generated using a mathematical algorithm. Where that number falls on a scale determines whether or not you have “good” credit. Your credit score is important because it lets lenders know if you’re “risky” to loan money to based on a number of factors. Most lenders rely on the FICO score, which ranges from 300 to 850—the closer to 850, the better! What factors affect your credit score? Your score is based on information on your credit report, which includes payment history, the amount of debt owed, how long you’ve had credit established, the types of credit you use, and new credit. How can you improve your credit score? There are a number of “good” actions you can take to improve your score, including:
Checking your credit score is easier now than it was in the past. Previously you could request a credit report from your bank for free once a year, but it didn’t always include your credit score. Now many banks and financial institutions offer the opportunity to check your credit score for free.Additionally, a lot of online services make it easy and convenient to check your score for free. How does your credit score affect homeownership? The biggest impact your score has on homeownership is your interest rate. Having a higher credit score typically means you’ll qualify for a lower interest rate because it tells lenders that you’ve been responsible about debt in the past. However, don’t be alarmed if your credit score isn’t great because there are a lot of other factors that lenders will look at including income, debt, and your front-end ratio. If you’re looking to purchase a home and worried about your credit situation, learn how you can start enhancing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.
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Improving your credit score is one of the best investments that you can make in your financial life.
Your credit score may determine whether you qualify for a student loan, mortgage, auto loan or credit card. Your credit score also may be used when you apply for insurance, rent an apartment or purchase a cell phone. To maximize your chance for approval and to help obtain the lowest interest rate, here are five easy steps that you can take to boost your credit score: 1. Check your credit reports for accuracy It is essential that you obtain a copy of your credit report and check it carefully. The Federal Trade Commission found that 5% of consumers had one or more errors on their credit report. There are three major credit bureaus: Experian, Equifax and TransUnion. Each credit bureau collects information on your credit history and develops a credit score that lenders use to assess your riskiness as a borrower. Under federal law, you are entitled to view your credit report every 12 months from each credit bureau. Since each credit bureau may have different information about your credit history, your credit score may vary across the three lenders. For a free copy of your credit report, you can visit Annualcreditreport.com or Credit Karma. Credit Karma, for example, will provide your credit score and credit report from two credit bureaus: Equifax and TransUnion. If you find an error, you should report it to the credit bureau immediately so that it can be corrected. Your credit score will not improve over night, but the sooner you take action, the better. 2. Develop a financial track record If you already have a credit history, but want to improve your credit score, you need to demonstrate that you are financially responsible. To do so, you need to develop a financial track record in good standing. Credit card companies, for example, closely monitor both your payment history and account age (how long the account has been open in good standing). If you have a credit card, start by making small purchases and paying off the balance in full each month. The longer that you can keep open a credit card in good standing, the better (so that you can increase your account age). Consistent on-time payment history and a long account age demonstrate both financial discipline and responsibility. 3. Do not open or close multiple credit cards at once Opening multiple credit card accounts at once will result in several hard inquiries to your credit report, which can cause your credit score to drop (at least temporarily). Credit card companies also will view you as a risky borrower. Likewise, if you have multiple credit cards, do not close them all at once. Even better, if you have an older credit card and it does not have an annual fee, you should consider keeping it open to demonstrate a longer credit history. 4. Keep your credit card utilization low Lenders evaluate your credit card utilization, or the relationship between your credit limit and spending in a given month. If your credit utilization is too high, lenders consider you higher risk. Ideally, your credit utilization show be less than 30%. For example, if you have a $10,000 credit limit on your credit card, ideally you should spend less than $3,000 in a given month. If you can use cash in lieu of a credit card to reduce your credit utilization to 20% or even 10%, your credit score should be even higher. Here are some ways to manage your credit card utilization:
5. Pay your bills on time Paying your bills on time is a major contributor to your credit score. Whether it is your utility bill, rent or student loan payment, you should always pay your bills on time. Failing to pay your bill on time can hurt your credit. FICO scores are weighted more heavily by recent payments so you can "override" a past missed payment by developing a pattern of more recent on-time payments. Therefore, if you have a delinquent payment, pay off the balance. However, missing a payment altogether can stay on your credit report for seven years. To avoid a late or missing payment each month, enroll in automatic payment with your service provider. Some service providers, such as student loan lenders, provide a financial incentive when you enroll in auto pay. For example, you may be eligible for a 0.25% interest rate deduction with your student loan lender when you enroll in automatic payments. If you have a choice to enroll in auto pay with your bank or directly your service provider, choose your service provider to ensure that your payment arrives on time each month. if you have any questions about your credit score or would like some information on how to raise your credit score fast and easy call or visit 323 776 6424 www.qualtiytradelines.com As of July 1, the nation's three credit reporting agencies will remove and exclude certain negative information from credit reports. Tax liens and civil debts will no longer be reported on credit reports if the negative information does not include a customer's name, address and Social Security Number or date of birth.
What Does This Mean For Me? Tax liens and civil debts can have a meaningful and negative impact on your credit score. According to FICO, although the impact of a tax lien diminishes over time, its presence on a credit report is "quite serious." Varous credit score simulators demonstrate that a tax lien could take as many as 100 points off your score, making it difficult to obtain credit or expensive if you do. If you have incomplete tax lien or civil debt records on your credit report, the removal should have a meaningful positive impact on your score. The change is supposed to happen on July 1, and you should see an immediate boost. Track your VantageScore for free at sites like CreditKarma. There are also a number of places where you can find your free FICO score, including from many credit card companies that offer the service to everyone (not just their customers). Why Is This Happening? One of the biggest complaint categories to the CFPB remains inaccurate information on credit reports. Under significant pressure, the credit reporting agencies are putting the burden of proof on the people and companies submitting negative information. These changes are not meant to reduce the negative impact of failing to make tax payments. Instead, the changes are meant to ensure that only accurate negative information is reported to the bureaus. Are There Any Downsides? For consumers in the short term, this will either be beneficial (to those people who have negative information removed) or neutral. However, there are some risks longer term. Having a tax lien on a credit report is highly predictive, and is a helpful indicator of credit risk. The reason people lose so many points from a tax lien is that the data shows how risky that behavior is. The downside is for lenders: now some risky people, with legitimate tax issues, will look less risky on credit reports. Over time, that could increase the default levels of better quality credit scores - driving up the cost of credit to everyone else in those better FICO buckets. Credit reports exist to ensure that the lowest risk people get the best terms and conditions. If higher risk people end up with lower risk scores, credit can become more expensive for everyone over time. Bottom Line There is a reason people complain about credit reporting agencies: there is too much sloppiness (at best) and fraud (at worst) in credit files. This recent move puts the burden of proof on people or entities filing negative information on credit reports. That is good news for consumers, and that is a good move long term. There is a short-term risk: people who legitimately avoided paying taxes benefit from the removal of negative information due to clerical errors. But that is still the right decision. If you cannot keep track of who owes you money, you shouldn't be able to file negative information on a credit report. contact us if you need to enhance your credit score by adding some tradelines 323 776 6424 www.qualitytradelines.com |
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June 2019
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