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    What is a Credit Score and How to Use it to Buy a House

    A credit score is a grade that shows how likely you are to pay your bills on time. The highest credit score possible is 850.

    The first step in understanding credit is knowing your credit score. So before going any farther take a quick second and get your credit score.

     

    1. Check Your Credit Score

    There is a lot of information out there about credit scores and how to fix them but no matter what strategy you use the first step is always to find out what your current score is.

    *TIP: Checking your credit score does NOT lower your credit score, so check as many times as you want

    These three sites provide the most accurate and reliable credit reports. All of them are free and none of them require a credit card.

    Credit Karma

    Credit Sesame

    Bankrate

     

    2. The Breakdown

     

    Now that you have your number let’s look at where you need to be in order to qualify for a mortgage and buy a home.

    There is a misconception out there that you need a credit score in the mid to high 700s to qualify for a mortgage.

    You will get better rates and terms in the 700s but you can still get a mortgage with a score lower than 700.

    This is what is available in each range.

    700+ Congratulations you have great credit and meet the basic qualifications for a conventional mortgage

    600s Your credit could be better, but you’re not out of the running for a home loan. In this range your best option is an FHA loan, or VA loan if you qualify.

    500s The minimum qualification for and FHA loan is 580. If you have credit lower than this, you need to bring up your credit scores before buying. (accordng to credit.com)

    Now you have your credit score and know whether you need to improve it or not.

    In order to improve your score you need to know what affects that number.

    The number one factor that affects your credit score is payment history. It makes up 30-35% of your score.

    The next largest factor is credit utilization. This just means that of your total credit limit how much are you using. Having $1,000 on a $5,000 credit limit is not a lot. But having $4,000 on a $5,000 credit limit will bring your credit down.

    About 15% of your credit score is determined by length of credit history, or how long you have been borrowing. So if you are trying to bring your score up don’t close any long term accounts.

    Types of credit makes up around 10% i.e credit cards, car loan, personal line of credit. There are two types of credit, installment accounts, such as car loans, mortgages and student loans. And revolving accounts, credit cards and lines of credits.

    A lender wants to see that you can handle both types of credit. If you have nothing but credit cards a car loan can improve your score, although it is not recommended to take out a loan just to improve credit.

    And finally, credit inquires. Hard inquiries are the type of inquiry that brings down your credit and these are made whenever your credit is checked for the purpose of extending credit, like for credit cards or a loan.

    Checking your credit score does not affect your credit.

     

    3. Steps to Improving your Score

     

    Payment History

    Along with a credit score you will get a credit report which shows payment history and if any debts went to collections. The very first thing to do when trying to improve a credit score is to check your credit report for any errors.

    If there are any errors, they need to be disputed. Some online credit checkers will allow you to file a dispute from their website. If not file a dispute with each agency that recorded the inaccurate information.

    Equifax

    Trans Union

    Experian

     

    If you have a late payment on a credit card, especially if it was an honest mistake, you can always call the credit card company and ask to have it removed.

    A lot of us have cards that we only use once in awhile and it’s easy to forget about them if they aren’t used regularly. And if you have a long history with that credit card it’s highly likely that the card company will remove it for you.

     

    Credit Utilization

    One of the factors that affects your credit is credit utilization, of the amount you are allowed to borrow how much of it is being carried over month to month.

    The sweet spot for credit utilization is less than 30%. For a $5,000 credit limit this would be $1,500.

    One way to improve credit utilization is to pay down your cards.

    A faster way to improve your score is to increase the credit limit. This will instantly decrease your credit utilization and have an immediate positive affect on your credit score.

    If you have a good payment history chances are your bank will approve you for a credit limit increase.

     

    What Not to Do

    As you work toward improving your credit there are few things you should NOT do. This list is a few of the things that can set you back when trying to improve credit.

    Don’t miss a payment- It’s important to continue to build good payment history, and missing only one payment can affect your score

    Don’t close any accounts- In the short run this will drop your score. If you have any dormant cards don’t worry about closing them. If they are in a danger of being closed due to disuse use the card to make a small purchase in order to keep it active.

    Don’t open new cards/loans- A hard inquiry is required when applying for any kind of new credit. Short term, a hard inquiry will drop your score so if you are planning to get a major loan, like a mortgage, it is not advised to open any new cards or lines of credit.

    *However, if you have no option to but to play the long game and build new credit, a new card may be the best bet.

    Don’t dispute every collection on your credit report- In some cases disputing an accurate negative collection on your credit report can get it removed. But if you do this for every collection the credit bureaus may not take your claim seriously, although they are required to investigate every dispute.

    Don’t hire a credit repair company- There are no secret techniques credit repair companies use that you cannot. Don’t pay for a service you don’t need.

    Don’t ignore your credit reports- Keep up with the changes happening to your credit score and credit report so you know what of your credit still need improvement.

     

    When do Credit Dings Expire?

    If you have accurate negative information on your credit reports, it can take a long time for it to expire. If you have any of the following things on your report the option is to make pay off debt while you wait for them to expire.

     

    Late payments: 7 years from the late payment date

    Foreclosures: 7 years

    Collection accounts: 7 years and 180 days from the date of delinquency on the original debt

    Short sales: 7 years

    Bankruptcies: 10 years from the filing date; 7 years for Chapter 13 cases

    Repossessions: 7 years

    Judgments: 7 years for paid judgments, longer for unpaid judgments

    Tax liens: 7 years once paid

    Charge-offs: 7 years from the date the account was charged off

     

    Rebuilding Credit

    If you have a combination of things contributing to a low score such as poor credit history and short history you may need a combination of strategies to improve the score.

     

    If you need build credit history but can’t qualify for a regular credit card a secured card might be a good option.

    If poor payment history is a problem that prevents you from borrowing a credit builder loan is a good option.

     

     

     

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    Michael H., North Bend