How Credit Scores Work And How To Raise Your Credit Score To Qualify For A Mortgage

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Every aspect of your financial life is better with a good credit score. These three digits make it easy to achieve several milestones. Presently, the report shows about 30% of Americans struggle to qualify for a mortgage due to bad credit. This article will go over how credit scores work and how you can successfully raise your score to qualify for a mortgage.

What Is A Credit Score?

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Your credit score is a number that helps lenders decide whether to approve a loan application or not. While several factors determine it, credit scores are algorithm-based, void of any human manipulation.

When you get a loan, the lenders use a report of your activities to compile a credit report. Unfortunately, reading through this report is time-consuming and can leave out essential details.

Computers program the same information and evaluate your activities to combat this challenge. With this, the algorithm gives you a credit score that serves as a quick but thorough assessment. A faster and accurate approach that replaces hours of reading through loan applications and credit information.

A personal credit score is based on the owner’s credit history. This includes credit card purchases, loans, and more. How about cash apps that accept prepaid cards? Do they affect your credit score? No, they don’t. Your spendings under a prepaid card are not reported and reflected on your personal credit score.

A decent or good credit score is essential because it estimates the risk of repaying. Therefore, lenders are more likely to favor a good credit rate. Credit reports show that credit scoring models impact the decision of lenders.

Lenders, banks, or credit unions check your credit score ranges to determine whether you’re up to the task of paying back or not. The truth is, a good credit score is beneficial to both parties. Lenders can make a clear and objective decision while you get what you want and remain in good standing.

For most loans, installment loans, or student loans, you need a VantageScore of 620. If your available credit score is higher, it’s better. For instance, borrowers with 740 and more will enjoy lower interest rates.

Types Of Credit Score

Every credit scoring model has at least one type of score. Although most people know FICO credit scores, there are different kinds of FICO scores for the major credit bureaus. There’s Equifax, Experian, and Transunion. Therefore, when it comes to your credit, the score type or scoring models are essential. Regardless of the score you use in the United States, most models work to predict the likelihood of paying on time. That said, the typical FICO score ranges from 300-850.

Primarily, there are multiple kinds of credit scores. Lenders may develop the custom scores individually. They do this because they want to make sure that credit reports, account history, and other related information are from their portfolio. This also impacts their lending decisions. Custom credit scores often affect specific kinds of lending like an auto loan, mortgage, and others.

On the contrary, many lenders like credit card companies and bureau businesses use generic credit scores to access general credit risk. However, the FICO score is more traditional and popular.

Credit Cards And Social Security Number

You can obtain a credit score without a social security number (SSN). Usually, financial institutions can locate anyone by their name, address, and date of birth. For them, the SSN is just another means of identification. Of course, it aids the accuracy of information. However, when you open a credit account without SSN, you can also get your credit score without it.

Scores Have The Following Components:

  • Payment history (35%). Have you missed out on a payment?
  • Current debt (30%). How much do you owe? Are maxed out on credit cards?
  • Length of credit (15%). Do you have a history of borrowing and not paying back?
  • New credit (10%). How many loans have you applied for recently?
  • Types of credit (10%). A type of credit mix: auto, home, and credit cards, among others.

What if you have no history of borrowing? First, a credit check is done, and lenders look at other credit utilization options like utility, bills, or rent.

What Determines Your Score?

The basic elements of a credit report shape your credit scores. These factors separate excellent credit from poor credit. Also, there are other determinants of your score. Some of these are:

  • Total debt
  • Types of account
  • Number of late payments
  • Age of account

While these could help your credit score, they could also mar it. Therefore, consider monitoring the above regularly in a bid to improve your creditworthiness.

Raising Your Score To Qualify For A Mortgage

Raise your credit score

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Your credit report and credit score are two essential elements that mortgage lenders consider before approving a mortgage. Generally, a good credit history alongside a high FICO score makes things more favorable for the consumer.

A higher FICO score is lower interest rates over the lifetime of the loan. Ultimately, you can save more when you improve your FICO credit score before applying for a mortgage.

The following are some tips to get the best and lower mortgage rates:

  • Know where you are. By law, you have one free credit report from these bureau companies: Equifax, TransUnion, and Experian. Note that the credit report does not mean a free credit score. However, some credit cards or banks provide free scores as part of their customer care package. Therefore, knowing how it all works is a baseline.

Consider running credit reports to know what to improve on. For example, when you get your Experian scores, you also get explanatory notes on risk factors and how to improve.

  • Learn how it works. We have established that consumer credit scores exist in varieties. The fact is, top lenders use your FICO scores when making a decision. As expected, each company establishes its criteria. That’s why knowing how it works before getting into it is a smart move.

Credit monitoring is one of the effective ways of curtailing errors. Also, consider credit reporting because it does not hurt your credit. Use it as a tool to improve the health of your financial standing.

  • Pay your debts. Improving your credit score by paying down your debts rubs good on you. If you keep it down to at least 30% of your credit limits, it will help your score and give it a boost. Mostly, paying down impacts credit scores positively in that the credit utilization ratio is high. Automatically, you obtain a better interest rate on the mortgage.
  • Pay bills on time. According to myFICO.com, credit accounts with late payments hardly look good. One late payment is enough to ruin your result. Paying to time is the only way to deal with this potential enemy
  • Quit applying for new credits while limiting big purchases. Taking on new debt or credits increases a potential failure to repay, as perceived by scoring models. Scores also dip when you accept a new loan offer or make big purchases. Besides credit scores, different credit bureaus consider debt-income ratios. Therefore, it makes sense to keep major purchases off the radar.
Why Lenders Use Credit Scores
  • Credit scores foster a fair assessment of all candidates.
  • A credit score is likely to be more consistent and objective.
  • It curtails the risk of identity theft on the part of consumers.
Bottom Line

A credit score splits the content of a credit report into three digits numbers. Therefore, when there’s an improvement, you will not miss it. Without a doubt, your score could determine whether you qualify for a mortgage or not. It is best to keep your credit in a good position as it speeds up the process. Make it a priority to correct errors in your credit reports to improve your outlook and chances.