It’s a good financial practice to check your credit report and score periodically. You want to be sure that no one has stolen your identity and that all the information on the report is correct. It may sound simple to check your credit, but there are so many sources that you can get it from and so many options that it can be a dizzying process. Read on to learn more about the basics of checking your credit and credit score.
Your Credit Score Comes From Different Sources
You can check your credit score from one source and find that the score varies from place to place. Why? There are a few different scoring models that are used to calculate scores. There could be as much as a 50 point difference between sites. There are also three credit reporting agencies. Each one uses a different method to calculate credit scores. Each method provides lenders with different information to allow them a picture of what type of borrower you will be.
Checking Your Score
Many different apps allow you to check your credit score. These enable users not only to see their scores but to see what can be done to improve the user’s credit report and score. You can’t see your credit report on these apps, but you can always head to annualcreditreport.com to check the full scope of your report. This is the only official site to pull your credit report fro the credit bureaus. Finding the right app to check your credit score is simple, it only takes a few minutes to sign up.
How Are Credit Scores Calculated?
Your credit score is calculated using a few different factors. Each credit bureau uses the formula a bit differently. Scores range from 300- 850. It’s pretty rare to see perfect credit at 850. Anything over 700 is considered “good” or excellent” credit. You need at least a score of 600 to obtain loans in most cases. The higher your score, the better the interest rate will be.
When Is The Best Time To Check The Score?
Before you apply for any large loan, it’s a good idea to check your credit rating. Taking a peek will allow you to see where you stand. You don’t want to apply for a loan and end up being surprised by problems with your credit. Many apps allow you to check your score on a monthly basis. It’s easy to stay on top of your credit score and especially important to know where you stand when you buy a home.
What is a credit score?Simply put, your credit score tells lenders how safe it is to lend money to you, i.e., the likeliness of you paying back your debt to them. In the United States, credit scores are awarded by three major companies. Since they use slightly different methods of scoring your credit, your score can vary slightly between them. What they all have in common, however, is that they put together your score based on your financial history (or lack thereof). How do they come about your score?
Parts of a credit scoreThink of an Olympic diver who just took a perfect dive. The judges off to the side are going to score her on a few different factors: her approach, her flight, and her entry into the water. They'll award her a number based on her dive and then those numbers are averaged to give her a score. Credit is scored in a similar way. You aren't judged just based on your payments or just based on how long you've had a credit card. Rather, you're judged based on a combination of five main things. For your FICO score (the score used by the majority of banks and lenders) those are:
- 35% - payment history
- 30% - current debt
- 15% - how long you've had credit
- 10% - types of credit
- 10% - new credit
Applying for your first home loan can seem scary or daunting to many first-time homeowners. However, this process, if done correctly, can save you thousands or tens of thousands of dollars on interest over the lifetime of your loan.
Before you apply for a loan, there are several documents you’ll want to gather and steps you’ll want to take to ensure the application process goes smoothly. In today’s post, we’ll talk about one specific aspect of the mortgage application process--credit scores.
Credit scores may seem confusing. However, since they can so drastically affect your home loan interest rate, it’s important to understand their implications.
Credit checks and mortgages
One of the things that all lenders will want to see before approving you for a home loan is your credit score. If you’re thinking of applying for a mortgage, odds are that you’ve been working to build credit by paying off loans and credit cards on time each month.
The three main credit bureaus in the U.S. are all required to give you a yearly free credit report. This is a detailed document that outlines your lines of credit, payment dates, and amounts. It’s a good idea to get a detailed credit report and check for errors before applying for a loan.
Unlike a hard “credit inquiry,” a free report does not affect your credit score, so you don’t have to worry about dropping a few points by requesting one of these reports.
When applying for a mortgage, however, lenders will perform a hard credit inquiry to determine your borrowing eligibility. This is a part of the pre-approval process and is typically unavoidable.
This is important to note if you are planning on applying to multiple lenders. Be aware that each “prequalification” and “preapproval” may come with a temporary drop in your credit score.
Since credit inquiries make up a total of about 10% of your credit score, these inquiries can make a difference in the short term. For this reason, it’s a good idea to avoid opening new cards or taking out other loans (such as an auto loan or student loan) within six months of your mortgage application.
If you aren’t sure of your current score, you can always check for free from websites like Credit Karma and Mint.
One last thing to note about credit scores and their relationship to mortgages is that most lenders use a specific type of score known as a FICO score. In fact, every adult in the United States with a credit score will have three FICO scores, one from each major credit bureau.
So, when checking up on your credit score, it’s good to remember that each score will be slightly different and your lender’s score may not reflect what you see online.
One of the most important factors that many home buyers face is that of their credit score. You have the right to get one free credit report per year. There are also many different apps and websites that keep you updated on your credit score and any changes in your credit report. These programs even guide you in how to improve your score.
Why Do We Have Credit Scores?
A credit score is a number that shows how creditworthy a person is. Lenders look at this score in order to assess how risky a person may be to lend to. This lessens the potential risks that the lender may face, keeping people who may be at high risk for defaulting from securing a loan in the first place.
What’s A Good Score?
Credit scores range from 300 to 850, with 850 being the highest score that you can get. A credit score of 700 or above is considered good. A credit score above 800 is seen as excellent. The bottom line is that the better your credit score is, the more reliable of a borrower you will be seen as by lenders.
If your credit score is less than stellar, however, you need to get to work so that you will be able to get loans in the near future. Here’s some steps that you can take to improve your credit:
Pay Off Outstanding Debt
If you owe anything on medical collection accounts, credit cards, legal judgements; basically any debt that will show up on your credit report, you need to pay these off. Getting rid of debt can help you to increase your credit score more quickly.
Rebuild Your Credit
You’ll need to keep up any accounts that you have with good payment history and maintain the good work. You should be diligent to maintain those on-time payments for an increased good payment history. Even if you have accounts that have had late payments previously, you can still work to get the accounts back in good order.
If you don’t happen to have any existing credit accounts, you’ll need to get one in order to begin establishing credit. A good way to do this is to apply for a credit card and only charge what you can afford each month in order to help establish a credit history.
Look At Your Whole Financial Picture
Aside from your credit score, you’ll need to take a look at your bigger financial picture. Everything from the amount of savings that you have available to how much of a home you’ll be able to afford is important. You need sufficient income so that you’ll be able to buy a home and provide a down payment along with money to pay closing costs.
Once you start investigating your credit score and how to improve it, you’ll be on your way to better financial health.