Things to Know About Credit

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Here’s how to clean up your credit so you get the least-expensive home loan possible. Boost your credit score by paying the balance on your credit cards in full, and on time, every month. Getting the loan that suits your situation at the best possible price and terms makes home buying easier and more affordable. Here are several ways to boost your FICO score so you can do just that:

Know what is on your credit report.
According to the Fair and Accurate Credit Transaction Act (FACT Act), the Law requires all three agencies (Equifax, Experian, and TransUnion) to provide Free annual credit reports.  Access all three versions of your credit report at www.annualcreditreport.com. Review them to ensure the information is accurate.

Correct errors on your credit report.
If you find mistakes on your credit report, write a letter to the credit-reporting agency explaining why you believe there’s an error. Send documents that support your case, and ask that the error be corrected or removed. Also write to the company, or debt collector, that reported the incorrect information to dispute the information, and ask to be copied on any materials sent to credit-reporting agencies.

Know your FICO Score.
The three major credit bureaus, Equifax, Experian, and TransUnion, are independent reporting companies that have nothing to do with each other. Each will have reports that contain different information, which is why they score differently. The information reported from a major bureau is scored by FICO, who gives you a FICO Score, which is the only score that banks recognize to base whether issue credit to a consumer.
FICO scores range from 300 to 850, and the higher, the better. They’re based on whether you’ve paid personal loans, car loans, credit cards, and other debt in full and on time in the past. They also take into account how long you have had credit history and how many inquiries you have made to acquiring credit in the last two years. You will need a score of at least 620 to qualify for a home loan and 740 to get the best interest rates and terms.
Lenders will pull all 3 scores and base off the middle score.

A “Credit Score” is not a “FICO Score”.
Each of the credit reporting bureaus have come up with a way to try and score their own reporting and calling it you “Credit Score”. Know that these are good guides to know approximately how your FICO Score might score, but they are not the actual FICO score. To know your actual FICO Score, you can visit myfico.com and pay to see your score, or see it the when you apply for a home mortgage (which would be a hard inquiry).

Hard Inquiry vs. Soft Inquiry
When you see your credit report, you will see inquiries from the last 2 years regarding your credit. A Hard Inquiry are inquiries made by a consumer to obtain a credit line, i.e. home loan, auto loan, or credit card. These are inquiries that will count against your credit score. You may also see some other inquiries you may not have made. The inquiries are made by a credit company to find out if they can solicit materials you the consumer for credit lines you may qualify for. These are called Soft Inquiries and do not count against your credit score.

Pay every bill on time.
You may be surprised at the damage even a few late payments will have on your credit score. The easiest way to make a big difference in your FICO score without altering your spending habits is to diligently pay all your bills on time. You’ll also save money because you’ll keep the money you’ve been spending on late fees. Credit card or mortgage companies probably won’t report minor late payments, those less than 30 days overdue, but you’ll still have to pay late fees.

Use credit carefully.
Another good way to boost your credit score is to pay your credit card bills in full every month. If you can’t do that, pay as much over your required minimum payment as possible to begin whittling away the debt. Stop using your credit cards to keep your balances from increasing, and transfer balances from high-interest credit cards to lower-interest cards.

Take care with the length of your credit.
Credit rating agencies also consider the length of your credit history. If you’ve had a credit card for a long time and managed it responsibly, that works in your favor. However, opening several new credit cards at once can lower the average age of your accounts, which pushes down your score. Likewise, closing credit card accounts lowers your available credit, so keep credit cards open even if you’re not using them.
If you have a department store credit card, and don’t really want to keep it, consider this: closing the account lowers your available line of credit, and lowers your score. Try buying something small every year to keep the credit line open, such as a pair of socks. Who can’t use a new pair of socks?

Don’t use all the credit you’re offered.
Credit scores are also based on how much credit you use compared with how much you’re offered. Using $1,000 of available credit will give you a lower score than having $1,000 of available credit and using $100 of it. Occasionally opening new lines of credit can boost your available credit, which also affects your score positively. Keeping your total balances to less than a 1/3 of available credit is good practice.

Be patient.
It can take time for your credit score to climb once you’ve begun working to improve it. Keep at it because the more distance you put between your spotty payment history and your current good payment record, the less damage you’ll do to your score.