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Your Credit Score - How important is it?
It's not much of a surprise for most to hear that when you apply for a mortgage, a bank will interpret your ability to pay them back by looking at a number. All the years you've been paying loans, car payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated into a number that will act as an indicator of whether you're likely to meet your mortgage obligations. This is your credit score.
There are three major credit reporting agencies:Equifax, Experian and TransUnion, and each uses a slightly different scoring system. Most mortgage folks take the middle number - so not the highest or lowest but yes, the middle credit score. While each of the models looks at a range of data available in your credit report, the big, basic factors you need to know they are weighing heavily are:
- Credit History - How long have you had credit
- Payment History - Do you pay your bills on time
- Credit Card Balances - How much do you owe on how many accounts
- Credit Inquiries - How many times have you had your credit checked (this one weighs less heavily than the other three)
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Each of these, and other items, are assigned a value and a weight. The results are added up and distilled into a single number. Scores range from 300 to 850, with higher being better. You will likely need at least a 700 score to qualify for a loan, nowadays.
Credit scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a low credit risk, and therefore likely qualify for a better mortgage rate. They will be looking at how long you've been in your work industry and what kind of money you might have in a retirement account, ect. as well but good credit scores are great at "scoring" a low interest rate.
How to improve your credit score? The score is based on a lifetime of credit history, so quick fixes aren't often doable. The most important thing is to know your score and ensure that your credit history is correct. They make mistakes all the time so even if you're not planning on buying for another year, it's a great time to check your credit reports and see if there are mistakes. A good mortgage broker might help you to get the mistake fixed, too. Check ou www.myFICO.com to do just that. For a reasonable fee, you can quickly get your credit score from all three reporting agencies, along with your credit report. Also available is helpful information and some tools to help analyze what actions might have the greatest impact on improving your score. Each of the credit services offers similar services on their web sites: www.equifax.com, www.experian.com, and www.transunion.com.
Armed with this information, you will be a more informed consumer and better positioned to obtain the most favorable mortgage available to you.
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