Tips for Improving Your Credit Score

Ginger Peel is a Mortgage Loan Originator with the Bank of Utah who has worked in the mortgage industry for over 30 years. I recently had the opportunity to ask her a few questions about how someone would go about improving their credit score in order to buy a home.

What is a FICO score and how is it calculated?

Peel:  A FICO score is a type of credit score created by Fair Isaac Corp that lenders use, along with other details, to evaluate a borrowers’ credit risk in order to determine whether or not to extend credit.

Why is it important to have a good FICO score if you are interested in buying a house?

Peel: It is important to have a good FICO score if you are interested in buying a home and obtaining financing from a lender.  Lenders follow guidelines from investors on what the minimum FICO score should be for a borrower.  Lenders will pull a credit report from all three credit bureaus: TransUnion, Experian, and Equifax, to determine the credit risk and qualifications to purchase a home.  Without a good FICO score, you may not be able to qualify for a mortgage loan.

What is the lowest score you can have to qualify for a loan?

Peel:  The minimum FICO score that most lenders want to see is 620.  Credit scores can range from the low end of 300 to the higher end of 850.  The higher your FICO score is, the better the loan program and the better the interest rate that you will qualify for.

What measures can you take to improve your score?

Peel: The FICO scores take into account various factors in 5 areas to determine your credit worthiness:

1. Your payment history makes up 35% of your FICO score. You will want to make sure that you pay all of your debts on time.
2. The amount owed to your creditors makes up 30% of your FICO score. You should attempt to keep your balances under 30% of the total credit limit.
3. Your length of credit history makes up 15% of your FICO score. FICO considers how long the oldest account has been open, compared to the newest account, and averages the term.
4. Types of credit used account for 10% of your FICO score. Make sure to keep revolving credit account balances low; don’t open new accounts too rapidly; and, open up different types of credit. Revolving credit is usually an adjustable rate loan, and the payment revolves according to your balance each month. Like a credit card. Installment credit is usually a fixed rate loan, and the payment is fixed each month, similar to a car loan.
5. New credit accounts make up for 10% of your FICO score.

How long does it take to see an improvement in your score?

To improve your credit score in 30 days – first, you will want to correct any errors on the credit report, and then. try to become an authorized user on another account in good standing, especially one that has been open for some time.  You can raise your available credit line by keeping your balance below 30% of the credit limit.  Also, make minimum payments on time, and pay off debt, rather than move it around. Reduce your debt to income ratio and have a good mix of debt.  Don’t close unused credit cards as a short-term strategy to raise your scores.

In her spare time, Ginger Peel enjoys cooking, gardening, and watching football. You can contact Ginger Peel to apply for a loan in English or Spanish.