Your Credit Score – What it means and how to increase it

Understanding Your Credit Score: The First Step for First-Time Home Buyers What is your credit score? How is it determined? How does it affect your ability to buy a new home in Dallas?

By Alice Adams, CasaNuevaGuide.com Contributing Editor

Learn all this, plus helpful tips for increasing your credit score. You’re ready to make that dream of home ownership come true, so your first step is to contact a lender and begin the process of determining whether or not you qualify for a home loan…and a big part of this process involves your credit score.

What is your credit score? It’s also known as your FICO score. FICO stands for Fair Isaac Corporation—the company that developed the formula to determine credit scores.

Your credit score is a number that helps a lender predict how likely you are to make your credit payments on time. It’s based on, but not part of, your credit report. However, your credit score is included with your credit report when a lender requests a copy.

Credit scores affect more than just your ability to borrow money. In addition, many insurance companies select customers and rates based partly on credit scores, and certain employers and landlords base their decisions on this information.

Five things that go into determining your credit score:

How well you pay your bills – and do you pay them on time (approximately 35% of your score)

Amounts owed (approximately 30%)

Length of time you’ve had credit (approximately 15%)

How many new credit accounts have you opened recently (approximately 10%)

Do you have different types of credit in use, like credit cards, bank loans and others (approximately 10%)

What’s a good credit score?

FICO scores range from 300-850. Most people score in the 600s and 700s. To most lenders, FICO credit scores above 700 are very good and a sign of good financial health. FICO scores below 600 indicate high risk to lenders and could lead lenders to charge you higher interest rates or turn down your credit application.

If your score is below 600 to 700, you will receive a list of up to four reasons why your score is not currently higher, and whether your credit report might contain errors. Knowing this can help you figure out how to improve your score.

Nine reasons for a lower credit score are:

More than one account with late payments.

You’ve had one or more accounts go to a collection agency.

Time since an account was paid late is too recent.

Too many accounts 60 to 90 days past due – or more.

Number of past-due accounts.

Too much owed on accounts.

Balances on revolving accounts are too high.

Length of time accounts have been established is too short

Too many accounts with balances.

Lenders buy your FICO score from three national credit reporting agencies: Equifax, Experian and TransUnion.

If you obtain a credit report and find errors, call and report it. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly.

As your data changes at the credit reporting company – when you buy something new on credit, pay off your car note or pay off a credit card, so will any new score based on your credit report. So your FICO score from a month ago is probably not the same score a lender would get from the credit reporting company today.

Here are some tips on how to increase your FICO score:

Pay your bills on time because late payments seriously hurt your score.

Don’t apply for credit frequently – at stores or credit card organizations

If you had a limited amount of credit, try to get more because insufficient credit can lower your score.

Pay down your credit cards. “Maxed out” cards will lower your credit score.

- by Alice Adams CasaNuevaGuide.com contributing writer