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What Is Your FICO Score, and Why it Matters

In the simplest terms, a FICO Score comprises a three-digit number gleaned from information in borrowers’ credit reports that allow lenders to determine how likely those borrowers are to repay their loans. FICO Scores range from 300 to 850. Today, 90 percent of the top lenders use FICO Scores, making it the most critical score in billions of annual lending decisions.

Although we take credit scores for granted these days, the concept hasn’t been around for that long. In fact, this mainstream scoring model only began in 1989 when the Fair, Isaac and Company launched FICO Scores to provide an industry standard that was deemed fair to consumers and lenders alike when it came to determining creditworthiness. Over time, the big three – Equifax, Experian, and TransUnion – emerged as the top credit reporting agencies.

How your FICO Score affects your purchasing power

As we said earlier, lenders use a FICO Score to determine how creditworthy you are as a borrower. In other words, how likely are you to repay that loan? You might look and sound earnest, but it’s your FICO Score that will let you the privilege of buying today and paying later. Consider the FICO Score as a rundown of your credit report. It states how long you’ve built credit, how much credit you have, how much available credit you’ve used, and whether you’ve paid on time. The plus side for lenders is that the information provided by a FICO Score helps them make solid and timely decisions regarding whom to lend money. For the borrower, well, they get quick and fair access to funds. But that’s not all. A borrower with a “fair” credit score will pay thousands of dollars more than the borrower with a “very good” score over the life of a loan. It doesn’t matter whether you’re taking out a loan for a car, school, or a mortgage – the higher your credit score, the lower your interest rate. Beyond lowering interest rates, good credit opens other opportunities ranging from credit cards with cashback bonuses and extra perks to lower auto insurance rates. 

How to boost your FICO Score

As a potential borrower, you’re not helpless when it comes to your FICO Score. You have the power to influence your credit score directly. The first method, obviously, is to maintain good credit and manage it responsibly from the start. But, let’s face it, sometimes life gets in the way, and our good intentions derail, and it takes time to get them back on track. All is not lost, however. Follow these tips to repair your credit history:

Check your credit report for errors

Do this first. While credit reporting agencies strive for accuracy, mistakes happen.

Pay your bills on time

Making payments on time to your creditors makes up 35 percent of a FICO Score calculation, and it is one of the most significant contributing factors to your credit scores. FICO Scores are calculated using a variety of credit data in your credit report. This data is grouped into five categories: payment history (35 percent), amounts owed (30 percent), credit history length (15 percent), new credit (10 percent), and credit mix (10 percent).

Because delinquent payments and collections negatively impact your FICO Scores, consider using your banks’ online payment reminders if they offer that service. Another option is enrolling in automatic payments through your credit card and loan providers and have charges automatically debited from your bank account.

Poor credit is a pain, but it doesn’t have to follow you forever. Once you’re in a position to pay your bills on time, keep it up. The longer you remain current, the more your FICO score should increase. Note that if you have an account that went into collection and you pay it off, it remains on your credit report for about seven years.

It’s a fact that you might have trouble making ends meet at some point in your life. If that happens, don’t keep the problem to yourself. Instead, reach out to a legitimate credit counselor, and they can help you manage your finances so that you can rebuild your credit over time.

Reduce your debt amount

It’s important to keep balances low on credit cards and other revolving credit because high outstanding debt can negatively affect a credit score.

Pay off a debt rather than juggle accounts. An effective way to improve your credit score is by paying down your credit card debt. Believe it or not, owing the same amount but having fewer open accounts could lower your scores. Make a payment plan that shifts the bulk of your payment budget to the highest interest cards first while maintaining minimum payments on your other accounts.

Although you might be tempted, don’t close unused credit cards as a short-term strategy to raise your scores. Conversely, don’t open new credit cards that you don’t need to increase your available credit. That move could actually lower your credit scores.

What credit score do I need to buy a house?

The short answer is that it depends on the type of loan you want and the lender you choose.

  • For instance, one of the top benefits of a VA-backed loan is that there is no industry-set minimum credit score, but most lenders will require a credit score that lands around 580 to secure a VA loan. So, even Veterans and active military should strive for a higher credit score if possible, but if it isn’t, they still have the opportunity to purchase a home.
  • The minimum credit score for an FHA loan requirement usually hits at the 580 mark. An FHA loan, insured by the Federal Housing Administration, might work for a borrower who hasn’t had the opportunity to stash a lot of money for a down payment.
  • When it comes to a conventional loan, the requirements begin to rise. If your credit score is below 620, be prepared to pay higher interest rates.
  • For borrowers who want to live in more rural areas or out in the suburbs, a government-backed USDA loan might fit the bill. Although the USDA doesn’t set a minimum credit score requirement, most lenders want to see a score of 640 to qualify. Note that it’s possible to qualify for a USDA loan with a lower score, but that usually means meeting other income and financial requirements.

Last word

As you can see, your credit score plays a major role in applying for a loan. You should become familiar with your credit report long before you begin the loan application process. Checking your credit score is simple. Each year, you’re entitled to a free credit report from all three major credit reporting agencies – Equifax, Experian, and TransUnion. Some online banks will even give you a free look at your FICO Score once a month. Staying on top of your credit score will serve you well and save you money.

At Aligned Mortgage, our team of experienced loan officers is happy to answer any questions you have about how your credit score affects your borrowing potential. We are always available to help you work toward realizing your dream of homeownership. 

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