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Improving Your Credit Score

One of the key factors that banks and lenders use to determine mortgage loan eligibility is credit score. Commonly referred to as a FICO score, it is a numerical score that represents your current credit situation as well as past credit history. There is a long and complicated mathmatical formula used to determine individual's credit score. However, having a good score is necessary for acheiving a lower rate loan for a variety of purposes. Scores can range dramatically based current and previous credit usage, balance amount and payment history. Below is a chart that depicts general guidelines regarding someone's FICO score.

Credit Score

< 620 A score below 620 may prevent a borrower from getting the best interest rates, as they may be considered a greater credit risk-but it does not mean that mortgage funding can't be found.

620 - 700 Scores between 620 and 700 indicate basically good credit. (Average FICO scores fall into this range) People with scores in this range have a good chance at a loan at a good rate, but may have to provide additional documentation and explanations to the lender before the loan is approved.

700+ In general, a score of 700 or above indicates a very good credit history. People with these scores will usually find the loan process quick and easy, and will have a good chance to obtain a loan at a relatively low rate of interest.

Scores reflect credit payment patterns over time with more emphasis on recent information. In general, a score may improve, if you: Pay your bills on time. Delinquent payments and collections can have a major negative impact on a score. Keep balances low on credit cards and other "revolving credit." High outstanding debt can affect a score.
Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix - it probably won't raise your score. Pay off debt rather than moving it around. Also don't close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score. Make sure the information in your credit report is correct, too. It won't affect your score to request and check your own credit report. If you find errors, contact the consumer reporting agency and your lender.
Items that make scores rise
Paying your bills on time is the single most important contributor to a good credit score. Even if the debt you owe is a small amount, it is crucial that you make payments on time. In addition, you should minimize outstanding debt, avoid overextending yourself and applying for credit needlessly.

Applications for credit show up as inquiries on your credit report, indicating to lenders that you may be taking on new debt. It may be to your advantage to use the credit you already have to prove your ongoing ability to manage credit responsibly. If you do have negative information on your credit report, such as late payments, a public record item (e.g., bankruptcy), or too many inquiries, you may want to pay your bills and wait. Time is often your best ally in improving credit.
One common question that many consumers have regarding their credit score involves understanding how very specific actions will affect their credit score. For example, someone might ask if closing two of his/her installment accounts would improve his/her credit score. While this question may appear to be easy to answer, there are many factors to consider. A credit score is based entirely on the information found on an individual’s credit report. Any change to the credit report could affect the individual’s score. Simply closing two accounts may not only lower the number of open installment accounts (which generally will improve your score) but it also lowers the total number of all open accounts (which generally lowers your score). Furthermore, such an action will affect the average age of all accounts that could either raise or lower your score. As you can see, one seemingly simple change actually affects a large number of items on the credit report. Therefore, it is impossible to provide a completely 100% accurate assessment of how one specific action will affect a person’s credit score.

How long does it take to rebuild a score? The length of time to rebuild your score after a decrease depends on the reason behind the drop in the score. Most decreases in scores are due to the addition of a new element to your credit report such as a delinquency or an inquiry. These new elements will continue to affect your score until they reach a certain age. Delinquencies remain on your credit report for seven years. Most public record items remain on your credit report for seven years, although some bankruptcies may remain for 10 years and unpaid tax liens remain for 15 years. Inquiries remain on your report for two years.