Whether you’ve heard it on the news or tried to obtain a mortgage or other type of loan recently, you know that the landscape of the lending environment has changed drastically than it was even one year ago. Even borrowers with high credit scores have run up against obstacles preventing them from obtaining a mortgage to buy or refinance a home.
While having a high credit score is still one of the primary factors lenders consider when loaning money, what was considered a great credit score (around 720) is now considered to be mediocre at best. If you don’t have a high credit score (now 750 or higher), hope is not lost because there are steps you can take to make yourself creditworthy.
“A significant outcome of the financial crisis has been a substantial tightening of mortgage underwriting guidelines,” says chief economist for Quicken Loans Bob Walters. ”As a result, a credit score has never been more important. In general, scores under 700 often have a higher interest rate that can cost a homeowner tens of thousands of dollars over the life of the loan.”
The first step in improving your credit score, and make yourself more creditworthy to lenders, is to understand how credit scores are calculated. Obviously, the better your credit history, the higher your credit score, but what factors play into calculating the score? Approximately:
- 35% of your credit score is derived from your payment history, so always making your payments on time boosts your score
- 30% relates to account balances, which have to be at manageable and reasonable amounts
- 15 % is the length of relationships with creditors (credit card companies, mortgage companies, auto loan lenders and more)
- 10% is related to credit types because the credit scoring agency likes to see you can manage different types of credit such as credit cards, student loans, auto loans, mortgages, etc.
- 10% is about establishing new credit, so it can improve your credit score to apply for new credit, preferably a type of credit that you may not already possess
Obtain your credit score for free to see what your score is. Once you know the score, you can work on maintaining or improving it by using the factors that influence your credit score.
Get Your Credit in Order
Understanding how your credit score is calculated is the first step to improving your credit score, but getting your credit in order goes beyond paying your bills on time. In order to understand areas of your credit history that are boosting or weighing down your score, you need to pull your free credit report.
Carefully review your credit report to identify inaccurate and negative information. If there is inaccurate information on your report, contact the credit agency to dispute the inaccurate items.
If negative items such as late payment, write-offs or collection accounts appear, contact the creditor or collection agency. Explain you want to take care of the debt or issues and work out payments arrangements or a reduced payoff balance to clear up the blemish on your credit.
When a lending environment has strict guidelines, like those currently in force, your credit score plays an even more important role in obtaining financing than it normally does. Take the time it requires to find out what is on your credit report and what your credit score is. Then take the steps necessary to maintain or improve your credit history and score. In a strict lending environment, this can make the difference between approval and denial and the terms and conditions for the loan.
For more tips and tools to help you manage your home, money and credit – including a totally free credit report and score, a tool to help you improve your credit and home loan recommendations – visit Quizzle.com.
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- How to Make Your Home Loan Experience Go Quickly & Smoothly
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