If you want to buy a home but your credit score is not good enough, you may want to know how it is figured so that you can concentrate on the right places to remedy and ways that you can best build your credit score.
The formula that FICO uses to determine your credit score is a secret from you and me. It would seem that in an age of full disclosure that you would be able to find out this information. Not so.
Previous credit performance: Trade lines, public records, collection segments: How long ago was the last delinquency What level of delinquency was reached. How many credit obligations have been delinquent.
Current level of indebtedness. Number of months since most recent 60 day or higher level of delinquency reached. Highest level of delinquency reached in the last year. Number of months since most recent derogatory public record. Average balance on revolving trade lines. Ratio of revolving debt to total revolving limits. Percentage outstanding on open installment loans.
Amount of time credit has been in use. Pursuit of new Credit: Inquiries: Dept Store multiple up to 68 days counted as one. Mortgage inquiries within 14 days counted as one. Automobile not counted within 30 days.
Types of Credit available: number of bankcards and inquiries.
Another way of looking at your FICO calculations is itemized here. The percentages add up to 100%.
Payment history is 35%. Pay on time. Do not have lates or past dues. Credit cards, retail accounts, installment loans, finance company accounts, mortgages. Bad things are: bankruptcy, judgments, suits, liens, wage attachments. Number of, amount and length of time past due.
Debt level is 30%. The amount of debt you have in comparison to your credit limit (Know as credit utilization). Keep your credit card balances at about 30% of your credit limit or less. Do not close dormant accounts--actually use them every once in a while to keep them active. If you close dormant accounts you lower the amount of overall credit you have, thus increase you credit utilization. If you have a card with a $10,000 limit and you owe $8000 then you are at 80% utilization which is too high. Pay down your balance to $3500 and your credit score should increase.
Length of Credit History accounts for 15% of your FICO score. Time since accounts were opened and since last activity.
New credit accounts for 10% of FICO. Number of recently opened accounts. The scoring models look at hard inquiries only. If you have too many hard inquiries it makes it look as if you are desperate for money. Pulling credit several times by lenders within a short time when you are shopping for a house should not lower your credit.
Types of credit used account for 10% of score. "Thin" files or lack of credit also hurts. When you have a thin file every move you make can have a dramatic effect of up or down swings. I know of people who mostly use cash. They have one or two "dings" on their credit and nothing positive. The result is a bad credit rating although they operate, very admirably, with cash and pay their bills on time.
In summary, paying off old delinquencies should improve your credit, not damage it. Get Current, make all payments on everything on time. Correct mistakes. Check for correct spelling of names, transposed names, similar names, similar social security numbers, different generations with similar name, multiple listing of same bad account. If you send a properly documented dispute to the three credit reporting agencies they must investigate within 30 days. They must forward the information about the dispute to the organization that launched the report. The organization must report back to the credit reporting agency.
Use less of what credit you have, use credit in moderation. Equifax, TransUnion and Experian only report what is reported to them. Once you have a loan in process, do nothing to affect your credit adversely. Don't buy anything for your new house. Don't buy a car. Check with your lender before you make a large purchase, especially with any financing involved. They may check your credit score and debt to income ratios right before the final processing of the loan. Don't start a credit dispute process regarding your creit right before you start looking for a home to buy.
Good luck in your credit repair efforts. If you work on credit in the right manner and give it time you should be able to buy a home soon. Contact me for references regarding those who specialize is cleaning up credit.
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