Did you get a surprise when you looked at your credit report? Did your lender inform you your credit score was just a bit low for the loan you’re seeking? In general consumers are fairly aware of their credit standing but may not know where their credit scores actually stand. Credit scores are calculated using an algorithm first developed by the FICO Company and are three digit numbers ranging from 300 to 850. Those with scores above 740 are considered to have “excellent” credit while those with scores below 580 are typically labeled “fair” or “poor.”
When applying for a mortgage a lender requests a credit report designed for the mortgage industry and at the same time request a credit score. While most mortgage programs don’t specify a minimum credit score lenders do. And even one or two points off can mean the difference between a loan approval and a delay. For example, if a minimum credit score requirement for a loan program is 620 and the reported score is 610 there’s not a lot a borrower can do except wait until the scores improve. But are there some things borrowers can do to help recover from a low credit score?
There are actually five separate categories that comprise the total credit score but two of those have the greatest impact. Payment history makes up 35% of the score and Available Credit 30%. Together that’s about two-thirds of the total score. If consumers concentrate on these two categories they can improve their credit scores more quickly.
Payment history means making on-time payments but what it really means is not making a payment more than 30 days past the due date. When a payment is made more than 30 days past the due date scores fall. More than 60 days and scores fall even further. By concentrating on making timely payments and eliminating late payments this will have the greatest impact on a credit score. For those who are facing financial difficulties they may not have much of a choice but for those who do have the funds available timely payments are the most important factor.
Second is the amount of available credit. Credit scores actually improve when there is a balance with timely payments being made. The ideal balance is approximately one-third of available credit. For example if there is a credit card limit of $10,000 and the balance is $3,000 scores will actually perform better compared to a zero balance. As the loan balance approaches 50% of available credit then scores will begin to falter and as the closer the balance gets to the limit scores will fall further still. Worse, if the balance exceeds the stated credit line scores will fall quickly.
There are other factors including how long someone has had credit, the types of credit used and how often someone applies for new credit affect credit scoring but by concentrating on payment history and keeping a keen eye on balances compared to credit lines, scores will begin to rise even after 30 days.
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