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Understanding Your Credit Score And How To Improve It

a man sits on a couch with headphones in looking at a laptop to learn what his credit score isThere are many components to your individual financial profile that lenders assess when examining a mortgage application. One of the most important is your credit score. A question for many first time homebuyers is, what is a good credit score? And how can you improve it?

What Is A Credit Score?

Three different credit reporting agencies calculate your score, and it is then tracked via your social security number. When you open a new account, a cell phone contract, or a credit card, the creditor sends your account information to the three major credit bureaus. These reports created by the bureaus are updated monthly to reflect your account balance, credit limit with each account, number of lines of credit open, and your history of payments.

These components, combined with your income, establish your “creditworthiness.” Creditworthiness is reflected as a number or credit score. The higher the score, the better your creditworthiness. This number also referred to as your FICO score, is founded on a data analytics program created in 1956 to calculate consumer credit risk.

Equifax, Experian, & Transunion are the three major credit reporting agencies. Ideally, the reports from each would be identical. However, the bureaus do not compare notes. These systems are not perfect and need to be supervised regularly. If you notice an error in a report, each bureau has a method to dispute the errors. Once you spot a discrepancy, be sure to submit a dispute, most can be done online, and the bureau is required to respond within 30 days.

What Is A Good Credit Score?

There is a spectrum for credit scores between 300 and 850. Most Bay Area lenders require a minimum credit score of 620 to get approved for a loan and a 740 score to get the best possible rates on a conventional loan.

How Can I Improve My Credit Score?

  1. If you need to establish credit, open a credit card, and make small charges each month. Make sure you can pay off the balance at the end of each month to avoid interest charges. Your payment history will start to build, allowing your lender to evaluate your creditworthiness.
  2. Avoid opening lines of credit for people other than yourself. If your friends or family default on their payments on the line of credit you opened for them, you will be personally responsible.
  3. Make your payments on time and try to pay more than the minimum. Use the tools your bank provides you, like an online payment tracker.
  4. Keep your credit balance as close to zero as possible. Understand that the higher your balance concerning your credit limit, the more your scores will drop.
  5. Check your credit score only when absolutely essential. Each time you pull your credit report, it reflects negatively in your score.
  6. Sign up for a secure credit tracking program. Most programs are free and will allow you to check your credit report without affecting your score. You will be notified of any changes, new credit inquiries, lower interest cards available, and insights to improve your creditworthiness.
  7. Use your credit cards on a regular basis but pay them off monthly. Unused credit cards will decrease your score. Make a few small purchases and then pay off the card entirely.
  8. Choose credit cards or loans with the lowest interest rate possible.
  9. Create a monthly budget for yourself, including necessities like housing and food, credit card payments, and some to save.
  10. Communicate with your creditors. Many Americans are stuck with several uncovered medical bills and still maintain costly medical insurance. In general, medical bills will not be reported to credit bureaus unless they go unpaid for months. Most medical offices will accept a monthly payment in exchange for not disclosing delinquency. If you encounter financial distress, the worst thing you can do is ignore your bills. Most people are unaware of the temporary hardship programs that banks have to assist you until you can get back on your feet.
  11. Don’t forget that you can negotiate with your creditors. Many times, medical bills can be resolved with a payment of less than the amount you owe. Be careful, however, if the bill has already been reported to the credit bureau, and you end up paying a lesser amount, your credit report will reflect a balance of zero but that you paid less than what you owe.
  12. Avoid credit consolidation companies or other credit repair companies that cost you money.

Keep in mind that any change made to your credit report will take at least 30 days and that the credit rating you have is cumulative over your life since it’s tied to your social security number.

Questions? Ask JVM Lending

If you are considering a future home purchase and have questions about how your credit score, contact our team! JVM Lending’s Mortgage Analysts are available 7 days a week by phone at 855-855-4491 or by email at jvmteam@jvmlending.com to help answer any questions or alleviate any concerns you might have about mortgage financing and the homebuying process.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167