By Derek Schoonmaker
Are you ready to buy a home but not sure about your credit? Do you have questions such as –
Where do I start?
What do these terms mean?
What information do I need?
Where do I find the information?
Just add a little fear of the unknown and you’ve stopped before you even started! I’m here to break it down and answer all of those questions in the first of 3 articles about your credit.
This article is meant to EXPLAIN YOUR CREDIT. First, why do we need to know this?
Credit has a large impact on a loan’s size, interest rate, and even your ability to get a loan, so its important to investigate your credit prior to searching for a home. Before you can optimize your credit, you must know its current standing. We’ll start with the basics of how to figure out your credit. In later articles we’ll learn how to improve your credit and important steps to take (and NOT take) prior to purchasing a home.
When I say credit, I really mean your credit report and your credit score because this is what lenders (the people who credit you money in the form of loans) look at. Whats the difference between these two things?
Your credit report is a history of your debt and how you’ve paid it. Imagine a stack of papers that hold every public financial decision you ever made. It gives insight into your financial status, obligations, and behavior to a lender. The credit report lists the debts/accounts you have currently, paid, OR cancelled:
- credit cards
- auto loans
- rental payments
- tax liens
- other bills
Each may list a host of information including:
- their balance
- history of payments
- timely payments
- late payments
- abandoned accounts/charge offs
- cancelled accounts
- accounts applied for
- credit available
- and other information.
HOW do you get your hands on a credit report? The good news – its FREE and EASY! Each year you’re entitled to 1 free credit report from each credit agency of which there are 3 – Equifax, Experian, and TransUnion. To get a free copy go to AnnualCreditReport.com.
I suggest spreading them out, getting one every 4 months. Each credit agency is independent, so if you request them all at once, you’re done for the year. However, if you are preparing your credit to purchase a house, go ahead and request 2 or all 3. Each report may be different and lenders could use any of the 3 credit reporting agencies. You want to make sure they’re all accurate to avoid any time-consuming complications when applying for a loan. More information on free credit reports from the FTC can be found here.
WARNING – Many websites you see advertising on TV will try to charge you for a credit report. AnnualCreditReport.com is the only federally sanctioned site for free reports.
In addition to a free credit report each year, you have the right to get a report if you’ve had credit denied. According to the FTC, “you’re entitled to a free report if a company takes adverse action against you, such as denying your application for credit, insurance, or employment, and you ask for your report within 60 days of receiving notice of the action.”
Once you have your credit reports go over them carefully for accuracy. Check for:
- Identity fraud or mistaken identity
- Open accounts that you closed
- Debts or credit inquiries that are not yours
- Credit mistakes such as available balance
- Personal information mistakes
- Late payments you made on time
To fix any discrepancies:
Equifax 1-800-685-1111 www.equifax.com
Experian 1-888-EXPERIAN www.experian.com
TransUnion 1-800-916-8800 www.transunion.com
The information in your credit report is used to generate a credit score. A credit score is a number that summarizes your credit risk to lenders. The most widely used credit score is a FICO® (Fair Isaac Corporation) Score which ranges from 300-850. The higher the score, the less risk to a creditor, and the better for you. Half of people have a FICO® Score below 725, and half above. If you’re above 760, expect a great rate. Below 620, your rate will be significantly higher.
BEFORE you get discouraged! Please consider the power in knowing your credit score. Yes, having a high score can give you leverage when shopping for a loan. BUT if it’s low, you now KNOW and can take steps to IMPROVE your credit worthiness.
Although your credit score weighs heavily on your credit worthiness, other factors such as income and employment history come into play as well. You could be refused or granted credit at any score.
Included in your score is payment history (35%), outstanding balances (30%), length of credit history (15%), new credit (10%), and types of credit (10%). This website has a more detailed break down on how your FICO® score is determined.
Unfortunately, FICO® scores are not free. You can purchase your score from one credit agency for $19.95 at myfico.com. BEWARE of the option you are choosing! There are recurring charge options, credit monitoring bundles, and individual FICO® scores. There’s not a bad option but make sure you know what you are purchasing.
You may also be considering applying for a home loan pre-approval. If you’ve spoken to any knowledgable real estate agent, they should have suggested this before shopping for a home. Your lender will sometimes charge you a small fee to cover the cost, so if you’re already at this point, pay your mortgage lender for the pre-approval/FICO® Score/credit report, and make sure they know you want a copy of them all before submitting. Some lenders will reveal your score, and some will not, so check first!
An important but lesser known fact about FICO® Scores is that each credit agency gives you a different number. Just as your reports may differ, so may your scores. This illustrates the importance of checking all 3 credit agencies before applying for a home loan. You do not want to lose a home you’d love to purchase because your lender uses a specific credit agency.
In closing, please keep in mind your credit is always evolving. Your most recent credit affects your FICO® Score more heavily than your past credit. If your credit score is high, maintain your financial responsibility. If its low, you have the power to change it. Watch for the next article in this series which will outline how to raise your FICO® Score and repair your credit.
I’m not a finance expert but am always here to help in any way I can. If you’re interested in real estate in South Florida, please contact me at Derek@DerekandJames.com or visit DerekandJames.com to see our amazing (I’m still in love with them) 3D virtual home tours which my real estate partner and I do for every one of our listings.