Understanding Your Credit-Report Score

When purchasing a home, whether your 1^st time, or your 10^th, most people want their credit score to be as high as possible. The higher the credit score, the better the interest rate and mortgage you will have access to. In order to do that, there are some basics that can help you optimize your score.

Firstly to have a credit score you must have established credit lines with an established history of payments. Some people think it's a great thing to pay for everything in cash and only cash. That's nice to be able to do that, but the ramifications are that you have no established, documented credit history then.

For someone who does not have a car loan or mortgage or credit cards, the first step would be to get a credit card (or two, if you can) to begin to establish a credit history. Even secured cards (having money to back the line of credit) will establish some history. This is not to say you can't pay it off every month if you want, but as these companies report to the credit bureaus, your credit history will begin to be established.

If you already have lines of credit and even a car loan or mortgage, the score will be based on your history of payments on those established lines of credit. If your score is lower than you'd like, it' s most likely because there is a history of either non-payment or late payments, significantly high balances or even a bankruptcy or foreclosure within recent history.

See the following chart to determine where your weak areas are so you can look at strengthening them.

Here's a breakdown of the weight each category has impacting your credit score:

• 35% - Payment History: Do you pay your bills on time? Have any judgments/tax liens/bankruptcy against you?
   

• 30% - Outstanding Balances on Revolving Credit:  90% of this score is based on credit cards vs. car-loan or mortgage.
   

• 15% - The Age of the Credit Line:  Average age of credit cards, etc. establishing the average length of credit history.
   

• 10% - The Mix of Credit Accounts: It's good to have a little of each: mortgage, installment loans, and revolving credit, etc...
   

• 10% - Amount of Times Your Credit is Pulled: The number of times you apply for new credit (maximum of 10 times per year).

Obviously the focus on the most heavily weighted categories is sensible, but if you only need a slight boost in numbers some of the more subtle aspects can give you that increase. One of the quickest & easiest ways to effect the scoring of the outstanding balances portion of your score (30%) is to balance out your credit cards so that each one is approximately the same percentage full.

If, for example, you have one favorite credit card that is mostly full and some others empty because you rarely use them, transfer some of the balance onto your other unused cards so they' re all 30% full or less. If you can transfer such that each is only 20% full, even better! But that will boost your score as soon as the credit card companies report to the bureaus.

By the way, it usually takes time and money for these credit card companies to report to the different credit bureaus, so if any information on your credit report is inaccurate, often it only takes one call to that credit card company to tell them to report to the bureaus and get you up to date.

Now you may be wondering what is a good score and how high do I need to be to get a loan? If you are above 500, you should be able to get some kind of loan. It may have an outrageous interest rate if you' re on the low end, but you can get one. Ideally, people want to be above 680 or above 720 to get optimal lending. Here is the classic FICO Model of scoring used for most mortgages to give you a rough idea.

• 700 and up = A+ credit

• 620 - 700 = B credit

• 520 - 620 = bad credit

• 500 - 520 = very bad credit

• Below 500 = horrible credit

Now how does the score affect your financing? Let' s use the example of a 30 year fixed loan on an average priced house - $250,000. Let' s examine the same house with the same loan type at six different levels of credit scores and how much the interest can vary. You will see that the savings over a 30 year period can be drastic.

Now that you understand the basics of credit scoring, you can take the NEXT STEP in obtaining the *Home of Your Dreams* - with the perfect mortgage-product for your needs.

Visit my Resources Page to lean more about obtaining a Minnesota Home Mortgage Loan from one of my TRUSTED and Preferred Lenders!