Getting a home loan today is almost impossible without a good credit score.   Mortgage brokers say you will need a score of 720 or higher to get the lowest interest rate on a conventional mortgage. Since scores range from 350 to 850, this means your recent credit history must be in very good shape.

But, if you are like many Americans, you may not understand exactly why the agencies have assigned you a particular rating.  Fortunately, the veil of secrecy surrounding so-called FICO scores is slowly lifting.  The information below will help you understand your current score.  It also will help you improve it or keep it high.

What Counts

Premier Mortgage Group says each of these five factors affect your credit score:

•  About 35 percent involves your payment history.

•  About 30 percent is determined by how much you owe when compared to your available credit.

•  Approximately 15 percent is determined by the length of your credit history.

•  Some 10 percent involves newly opened credit. New credit can bring your score down.

•  About 10 percent is based on the kinds of credit you have.

The three credit agencies, Experian, Equifax and TransUnion often report divergent numbers because they may have different information from creditors.

Also note that these are not the exact percentages. They can vary depending on your specific situation. 

Says MyFico.com: "These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different."


Keeping Your Score High

Advantage Credit of Colorado offers these tips about keeping your score in good shape:

•  Pay bills on time or early.

•  Do not close old revolving accounts you no longer use.

•  Do not open new accounts unless absolutely necessary.

•  Do not co-sign loans for other people.

•  Report fraud immediately.  Contact your credit card companies, the credit bureaus and your banks.

•  If you will soon buy a home or refinance your current dwelling,  do not run up credit card balances or make major purchases.

Monitor your credit by ordering copies of your three credit reports once a year. You can do this at www.annualcreditreport.com. 


Reading Your Credit Report

In an article by Patrick Ritchie, the National Association of Realtors® suggests you look for the following kinds of mistakes in your reports:

•  Late payments more than seven years old should not appear in the report. Similarly, collections or “charge-offs”  older than seven years should not be noted. A “charge-off” is recorded when your creditor declares your unpaid debt as a business loss. You may still owe the money.

•  Paid-in-full installment loans and loans settled for less than the full amount should show a zero balance on your credit report.

•  You should recognize every account in your report.  Identity theft or inaccurate reporting by creditors can lead to incorrect accounts appearing in your report.  Investigate these quickly and vigorously!

•  Since length of credit history counts, check  the accuracy of dates you opened your accounts.

•  Credit limits should be reported correctly.  You want to keep balances under 50 percent of allowable credit. Lower balances will be better.

•  Credit should be properly categorized.  A home equity line of credit is a second mortgage, not a ordinary line of credit.

•  Understand the “reason codes.”  These help explain your score and may tell you how to improve it.  However, the Realtors® association suggests that people with good credit scores ignore the codes, “as making changes could actually result in a lower score.”

The organization offers one final piece of advice. “Think twice before closing that credit card, which shrinks the available credit listed on your report and hurts the utilization/available credit ratio.”

Some New Information About "Damage Points."

According to CrediCards.com, FICO recently provided information about the impact  specific "mistakes" can have on your score.  The website said,  a maxed-out credit card drops your score 10 to 45 points; a payment 30 days late will damage your score 60 to 110 points;  a debt settlement (presumably for less than what is owed) will hit you for 45 to 125 points; a foreclosure will cost you 85 to 160 points; and bankruptcy will drop you 130 to 240 points.

CreditCards.com writer Jeremy M. Simon said in a news story that people with higher scores are assessed more "damage points."

For more information from FICO, click here and here.  For CreditCard.com, click here.


(Ron Rovtar is a broker associate at Prudential Real Estate of the Rockies in Boulder.  He can be reached at 303.473.1926)



This Article © Ron Rovtar/All Rights Reserved