| How do you know if your credit history is healthy?
First, don't rely on guesswork. Order a copy of your credit record,
preferably three months before applying for a loan. You'll see where you
stand and have time to clear up errors, which are a common finding, on
your record.
How Is Credit Risk Measured?
The information measured is gathered from retailers, public records, and
sometimes credit applications and bank records. The score analyzes
patterns over time, with more recent payment and debt habits holding
greater weight. In the scoring system used by Fair, Isaac-the
originators of scoring software-the main criteria and their approximate
percentage of importance are:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit-a warning of taking on too much debt
(10%)
- Types of credit in use (10%) Lenders use these
credit scores, which range from 400 to 900 points, along with
information such as the stability of your income, your employment
history, and the value of any collateral and liquid assets, to
determine your credit risk.
How to get your FREE Credit Report?
Go to
www.AnnualCreditReport.com for your Annual Free Credit Report.
Or call 1-877-322-8228.
Establishing Good Credit
These tips will help you establish and maintain a healthy credit
history:
- Open an account. The
only stumbling block as serious as poor credit history is no credit
history. To receive an automated credit scoring, you must have at
least one account that's been open longer than six months and shows
activity within the past six months. (On-time utility and rent
payments may apply.) To establish credit, start by requesting a
credit card from your bank; that will trigger other offers.
- Don't go crazy on credit.
Don't rush to open multiple accounts just so you can
pay them off to raise your credit rating. Lenders see too many
credit applications as a sign that your finances might be
overextended. Applying for new accounts actually lowers your rating,
since it lowers the average length of your account history-and,
especially if you're new at using credit, it signifies risky
behavior.
- Pay down before saving up.
Lots of savings or a high income may help you with a
down payment, but if your credit history is questionable, you'll be
lucky to reach that point. Lenders want a track record of
responsible debt payment-that's how they make their living. Make a
habit of paying your bills, preferably in full but always on time.
Paying down debts also saves you more on each dollar by reducing
high interest payments.
- Minimize credit checks.
Whenever someone requests your credit report, it
appears in your credit history. According to Fair, Isaac, you can
order copies of your own report from credit reporting agencies
without worry; they even advise that you do this annually to check
its accuracy, especially before a large purchase such as a house or
car. But it could be a red flag if too many loan officers, credit
card companies, or car dealerships are requesting your credit
record.
- Don't take it to the limit .
Lenders are wary of too many cards, but a bigger
warning sign is even one account that's maxed out; they see it as a
sign that you're overextended. The ideal is to use only one or two
cards with medium balances that you pay on time (remember,
punctuality is more impressive than full payments). On the other
hand, if your debts reach the limit on one or two cards it's better
to redistribute lower balances over several accounts.
- Hold off on purchasing big "toys."
Lenders like low debt, so unless yours is very low,
hold off on charging a car, a boat, appliances, or large furniture
until after you've closed on a new house.
Cleaning Up Your Credit
If you have credit problems, make improvements before applying for a
loan. Even if your history includes a bankruptcy or foreclosure,
following these tips can polish up your record enough to help you
qualify for a future loan:
- If you've made late payments in the past, take
six months to a year and make e very payment on time before applying
for a loan.
- Use cash whenever possible, and stop charging.
- Use secure savings to pay down high debts vs.
saving for a down payment that may never happen.
- Lower the balances on all credit cards; as
they're paid off, write to each company canceling your account until
just one or two remain.
- Pay down installment loans such as car payments.
- Don't open any new credit accounts.
- If you've had a good credit history for seven
years (the period considered in scoring), but it was damaged by
extenuating circumstances, write a 100-word explanation to file with
your loan application.
- For serious credit problems, ask a credit
counseling center about signing up for a home buyer's payoff program
and apply for a loan only when you're nearing the end of the
program.
Still turned down?
If your lender turns down your application because of poor credit, ask
for precise reasons and for a copy of your Residential Mortgage Credit
Report. If it contains errors, be sure the dates of facts in question
are within the past seven years; anything older shouldn't be used to
assess your credit risk. Advise your lender of errors immediately, and
contact the relevant agency or agencies below to request a new
investigation of questionable areas. And be sure that credit accounts
you've closed are noted as "closed by consumer."
( Note: Closing an inactive account doesn't remove its history
from your record.) Finally, ask your lender if you're a good candidate
for "rapid rescoring"-a growing trend in which a local credit-reporting
agency analyzes your report for inaccuracies and gives specific advice,
potentially raising your score in a matter of days.
If you're turned down for a conventional loan because
of credit problems, you can probably still qualify for a loan with a
lender that works with people who have a B or C credit rating or a
subprime lender, but expect a substantially higher interest rate. But be
extremely cautious with "special" loans offered to high-risk first-time
buyers-they often demand impossibly high interest rates or promise
future refinances that never happen.
provided by Bankrate |
