The term “credit score” is often thrown around in everyday conversations as easily as “shoe size” or “how are you,” but few of us understand really what it is, what it means, or why it is important to track it. Although our specialty is home sales and not personal finance, we have found it helpful for our clients to be familiar with what their credit score is and how it affects their ability to buy and finance a home.
Your personal financial situation is inextricably linked to your ability to buy a home and how much home you can afford. Your first move when thinking about a home purchase is to talk to a licensed mortgage broker who can take a bird’s-eye view of your finances and advise you on what financing options are available to you based on how much you can put down as well as your credit score. However, we recognize that it is helpful and empowering to be armed with a little knowledge before you have those initial conversations, which is where this blog comes in!
What is the meaning of “credit score?”
According to Investopedia.com, a credit score “is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders.” Your credit score is determined by your credit history, which includes your debt level, payment history, and the number of open accounts in your name, among other things. When lenders want to determine a borrower’s ability to repay a loan, they look at the credit score to predict the probability of timely repayment. The lender takes on liability for lending the money, so it makes sense that they want to loan to people who are more likely to stick to the terms of the loan and pay back the money as anticipated and agreed upon. Your credit score is the measuring stick by which they gauge this.
Credit scores fall into several categories:
| Score | Category |
| 800-850 | Exceptional |
| 740-799 | Very Good |
| 670-739 | Good |
| 580-669 | Fair |
| 300-579 | Poor |
The good news is that your credit score is simply a snapshot of your credit history at a point in time and your credit score can improve with a change of behavior. But be aware: your credit score can likewise deteriorate if you stop acting responsibly with your money. A credit score is not forever.
Where can I find my credit score?
The Fair Isaac Corporation created the credit score model that is commonly referred to as FICO. While there are other credit scoring models in the industry, FICO along with VantageScore dominate the industry. Generally a high score from one means a high score from the other.
Currently three of the largest credit bureaus that gather data about your credit accounts and compile them into reports are Equifax, Experian, and TransUnion, using the FICO and VantageScore models. These reports are available from a number of third party sources.
There are numerous places to check your credit score, but here are a few to look into:
How can I improve my credit score?
There are five components that make-up your credit score. If you keep these clean as a whistle, your credit score will improve:
- Payment History–do you pay your bills on time?
- Amounts Owed–spending limit and how close you get to it
- Length of Credit History–the longer your history, the better
- New Credit–applying for new credit too frequently can hurt your score
- Credit Mix–what different types of credit have been in your name?
and abstain from maxing out your credit every month.
While a google search of “how to improve my credit score” will yield a plethora of answers from various financial institutions, we turned to news outlets to learn more. According to this report from National Public Radio (NPR), the first thing to do is to always pay off your monthly credit lines in full and on time. If you need help getting credit established, appeal to a responsible family member and asked to be added to their credit card account.
Additionally, resist the urge to max out your credit cards every month. Keep your spending well below your credit limit. Experts recommend keeping your credit card spending at 30% of your limit, and preferably keep it at 15-20%.
Also try to avoid “hard inquiries” into your credit.
How often should I monitor my credit score and Why should I care?
Checking your score does not hurt your credit and it is good to know what it is before a lender looks at it when he or she is trying to determine your ability to pay back a loan.
It is important to use the came score (VantageScore or FICO) everytime you check so you can be sure to compare apples to apples.
At minimum, you should check your credit score once a year, but most experts agree that you check it quarterly, if not once a month. Staying aware of your credit score can help you react quickly if a reporting mistake or fraud occurs.
The Fair Credit Report Act (FCRA) gives you rights when it comes to credit reporting. So, if you do notice something amiss, the law is on your side for getting it corrected so that your credit report doesn’t end up causing problems for you down the road.
In conclusion…
You need to care about your credit score and learning about what makes for good credit can be a game changer when it comes to buying a house. Talk to your F.C. Tucker Emge agent if you need the names of local financial gurus who can help you learn more about your credit score and how to maintain and improve it. We want the best for our clients as they navigate the housing market, and your financial picture can have a big impact on getting to the closing table. Now is the time to talk.
