By Donald Isaac
If you’re thinking about buying a house or a car, your credit score from the The Fair Isaac Corporation (FICO) is a very important number. FICO score is between 300 and 850. Higher scores indicate lower credit risk. Each individual actually has three different FICO scores because each of the three national credit bureaus, Equinox, Experian and TransUnion has its own database.
The interest rate you’ll pay for the money you borrow will be determined, in large part, by this three-digit number that’s generated from the information in your credit report.
Most lenders have carved-in-stone rules about handing out the best terms, and those rules almost always place a major emphasis on your credit score. If their best rates are offered to borrowers with a score of 700 or higher and yours is a 698, those two points could cost you thousands of dollars.
On a $165,000 30-year fixed-rate mortgage, that difference could cost you more than $13,378 in interest charges, assuming a 4.5 percent interest rate with a 700 credit score and a 4.875 percent rate on a 698 score. Fall below a 660 and the rate goes up even more, if you can even get approved for a mortgage at all.
Keep in mind that these are averages. Most lenders today practice tiered pricing, with interest rates rising as scores go down. Each lender chooses its own “break points” between tiers. Lender A may bump up the interest rate if a score falls below 700, while Lender B doesn’t charge higher rates until the score is 690 or below. So if you stick with one lender, and that lender’s break point is 700, raising your score from 698 to 701 can be vital.
This underscores the importance of not only doing all you can to improve your score, but shopping thoroughly when looking for a mortgage. From the perspective of a mortgage broker, who can choose among a sea of many lenders, there are no sharp break points. Consumers should do what a good broker does — look for a lender that offers the best rate for a specific score.
The key to having the best FICO score possible is following three rules, Pay all your bills on time, every time, keep your credit card balances low and only open new credit when you need it.”
I realize that is good advice, but some of us are currently house hunting or searching for a loan and need a few extra points to increase our score.
Start by pulling your credit report and your FICO score to see where you are. To get an estimate of your credit score, check out www.Creditkarma.com If your score is above a 760, you’re golden. Improving your score from 760 to 800 won’t get you better terms.
What you’re looking for on your report are factors that could be affecting your score. Look for errors in the report, such as accounts that aren’t yours, late payments that were actually paid on time, debts you paid off that are shown as outstanding, or old debts that shouldn’t be reported any longer. (Negatives are supposed to be deleted after seven years, with the exception of bankruptcies, which can stay for as long as 10 years.)
After repairing errors, the fastest route to a better score is paying down balances on credit cards. Though it’s not an instant cure, paying down credit lines over a two-month period can boost your score a substantial amount, and may be enough to put it over the edge if you’re just beneath the next tier of loan pricing.
Had a few late payments in your past? Even if you’ve paid your bills late in the past, you can improve your credit score by paying every bill on time and keeping balances low from now on.
One thing you shouldn’t do if you’re just trying to boost your score is close unused accounts.
The length of your credit history is another factor in your score. If you close the account of the credit card you got when you were a freshman in college and leave open the ones you just got within the past couple years, it makes you look like a much newer borrower. Keep a couple of the oldest open; Regardless of what the interest rate is, creditors don’t care what the rate is.
Finally, if you’re in the middle of qualifying for a mortgage and need a score boost in a hurry, you can speed the process along with rapid rescoring. If you have legitimate negative information on your credit report, such as late payments or accounts in collections, you’re out of luck. But the process of rapid rescoring can help increase your score within a few days by correcting errors or paying off account balances.
You can’t do this one yourself; you’ll need a lender who is a customer of a rapid rescoring service. Generally, the service will run roughly $50 for every account on your credit report that needs to be addressed, but it could save you thousands on your loan.
If a consumer can find a lender who is a customer of a rapid rescoring service, new information can be posted within 72 hours.
Some helpful online tools are available to find out which strategies could have the most impact on your score. MyFICO.com site offers a credit score simulator when you purchase a credit report or a credit score. It offers seven simulated scenarios, such as how paying down your account balances — or not paying any of your bills on time this month — would affect your score.
There are things you can do to improve your score. You need to understand what your credit is like now and what’s influencing your score today. Then you can take an objective look at the different options available.”
Donald L. Isaac Sr.
3200 Martin Luther King Ave. S.E.
Washington, D.C. 20032
(202) 563-5200 office
(202) 427-7620 cell