Did you know that there are 56 scoring models in FICO? And what’s a FICO anyway? Working in this business I come across all sorts of credit: the good, bad, and the spectacular so I thought I was fairly in-the-know about credit when it comes to mortgage applications, but I learned a few things and I wanted to pass them along to you. Even if this isn’t your year to buy a house, a car, or apply for credit, there’s some tips in here for you to know and share like how to protect yourself from identity theft and how to improve your credit score when you want to buy a house.
Let’s start off with a level-set. A FICO is a 3 digit score developed by a company by the name of Fair Isaac Company. It takes into account your credit worthiness. The score is made up of an algorithm that assesses different factors about your credit and assigns it a number between 300-850. The higher the score, the better your credit.
While there are many models out there, Credit Karma, each of the credit bureaus (Trans Union, Equifax, and Experian) to name just a handful, mortgage lenders utilize only FICO and FICO’s secret sauce of components. So what that means is that you can look up your credit score on Credit Karma and it can be 100 points different from your FICO score and that 100 points can mean the difference between getting you the lowest interest rate and a higher one which could cost you thousands of dollars over the life of your loan.
There’s basically two parts to a credit profile: the first part is the actual payment history of each credit account which includes any collections accounts, judgments, and tax liens and the 3 digit score which makes it easier for lenders of all sorts to bucket people for credit applications. The 3 digit score is wholly derived from the account history and basically distills your credit history to a number. The concept certainly makes things easier on the lender but did you know that it’s estimated that over 85% of credit reports have errors? Errors can cost you money.
The credit score components are made up of the following: inquiries on your credit – these are hard credit pulls which you authorize (pulling your own credit doesn’t count), mix of credit – credit mix include credit cards, student loans, automobile loans and mortgages. The credit mix will impact you more with less credit, age of credit – longer is better so don’t close out cards that are paid off right before you’re going to get qualified because you can sink your score, debt ratio – think of this as your credit utilization score. The more you’re using of your credit, the worse your score, and lastly there’s delinquencies – that means you paid you paid your bill late. Sometimes you move and you forget to put a forwarding address and you forget to pay or you’ve been negligent in paying in a timely manner – this one will hurt you the most followed by the debt ratio so learn to manage your credit.
Sometimes though, it’s important to get help because it’s not always easy to figure what to do or how exactly to do it. I met with Mandy McGinnis, Relationship Manager, for Blue Water Credit who provided me with some other important information. Blue Water Credit is known in the industry as a credit repair company because they help consumers to get on track to improve their credit history which in turn, improves that very important FICO score. They’re a local company and they usually work with lenders to help their clients get their scores up, but you can contact them directly.
Mandy explained that the number one reason that clients seek them out to help is when they’ve been hit by unexpected medical bills which need to be paid off and cleared off their credit reports. She says they also see a lot of poor management of credit. Instant gratification plays a role in sinking the proverbial ship when there’s no savings. She reminded me of a fact that I read: 65% of Americans save little or nothing so there’s no buffer to cover the emergencies that can pop up – like medical bills or a leaky roof.
Poor management includes not being attentive to the due dates and paying bills late. Credit card companies take advantage of people this way as well. They’ll create due dates on the weekend but not process payments then so that you miss the due date and they can jack up your interest rate to 30%. This happened to me about 10 years ago and I promptly paid off the card and closed the account, but if you owe too much, a payoff might not be possible and the situation can snowball.
Another rising issue is identity theft. You probably have heard that Equifax was hacked, not once but twice! 14.5 million customers’ financial information is now out there for thieves to open accounts in your name and impersonate you! Stay on top of it! First, make it a habit to check your credit every year for free on AnnualCreditReport.com and if you don’t need to apply for credit, put a freeze on your credit. It must be accomplished with all three bureaus. $10 for each bureau to freeze and $10 for each bureau to unfreeze. You can call the major three bureaus as follows:
- Equifax — 1-800-349-9960
- Experian — 1‑888‑397‑3742
- TransUnion — 1-888-909-8872
Know that when it comes time to apply for a mortgage loan, you will have to unfreeze your credit and you’ll want to make sure that your credit score is as high as it can be to qualify for the best rates especially now that interest rates are rising. The following are 6 ways that a credit repair company such as Blue Water Credit can help you increase your score by up to 100 points:
- Reduce credit card balances to between 1-10% of the limits. Notice that doesn’t say “0” and that’s because the card companies actually want to see you utilize credit.
- Negotiate to have any paid Federal tax liens removed from your credit report.
- Settle accounts with medical providers, utility companies, and tickets, fines, and citations.
- Help you to open a secured credit card to establish or re-establish credit.
- Help to extract your credit from an authorized user on your account whose credit is tarnished.
- Help to add a spouse’s good credit cards to the other spouse whose credit needs some improvement.
Managing your money and your credit is important. It’s certainly necessary when you’re interested in buying a home. Reach out to me for a special discount you can use with Blue Water Credit.
This Friday, I’ll be publishing the annual 4th of July activities…I’m still checking to get the latest on the fireworks displays as some cities have seen some budget cuts.