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    What Goes Into a Credit Score?

    By December 28, 2021No Comments

    When buying a home, your credit score has a MASSIVE impact on how much you will pay. If your credit score is not at least 700, then improving your credit score is the first step towards buying a home. Although it is not the only way banks determine whether you are a good credit risk, this score is important when buying a home in Tallahassee.

    Get a Free Copy of Your Credit Report

    The first financial step to take when you are buying a home is to check your credit report.  Credit reports contain information on your debts and payment history as well as where you have lived, whether you have judgments, liens, or bankruptcies.  The agencies take this information and each has a ‘secret sauce’ they use to publish a single number indicating your risk to lenders. Local lenders use three main credit reporting agencies: Experian, TransUnion, and Equifax.  Each receives different information and take into account other factors, and each report must be valid and accurate.

    Since COVID has left many consumers struggling to meet financial obligations, you can request a free credit report every week through April 2022.  Check out this website to order your free credit report: Free Credit Report Site

    Carefully review your report and if you find any errors, report them immediately to have them removed from your file.  Experienced Tallahassee Realtors will tell you that this is often the first time someone finds out they have been a victim of identity theft.

    Storytime: We worked with customers that wanted to put an offer on a home they toured at an open house.  They did not get preapproved because they made plenty of money and always paid their bills on time.  Unfortunately, they found out after their offer was accepted that a cousin of the husband had stolen his identification and taken out thousands in credit card debt.  It was heartbreaking for everyone involved. This is a good reason to get preapproved before you look at houses and fall in love with a home.

    If you find an error on your report, file a dispute as soon as you can.  Keep copies of all your communication with the credit agencies and continue to monitor your credit report.  The Federal Trade Commission has useful information for consumers on their website. You can check out how to dispute errors on your credit report.

    What Factors Your Credit Score Is Based On

    Even though we cannot tell you exactly what the secret sauce is behind your credit score, we can tell you the main factors all three of the companies evaluate when they are calculating your score.

    Payment history

    Do you pay on time? Payment history makes up the biggest part of a credit score (35%).  Paying everything on time for at least 6 months will help increase your score. When you are buying a home, lenders want to make sure you have experience with debt and will pay them back.

    Total amount owed

    How much revolving debt do you owe monthly, and do you use it all? This is approximately 30% of the score. It considers the total amount of credit available and how much has been used, also known as credit utilization. If you have used all the credit available to you (100%) then the banks may feel you are not using credit wisely.

    Length of credit history

    How long you have been responsibly handling your debts? This is approximately 15% of the credit score. If you have held the accounts for many years, you have a longer history of paying as promised and are less credit risky than if you have just opened all the accounts in the past year. So when you pay down your debt – do not close accounts you have had for years.  Older accounts help increase your score.

    Types of credit

    What kinds of accounts do you have open? This is 10% of the credit score and takes into consideration whether you have only credit cards, or a mix of installment loans (like a car loan) and other credit debt. Student loans impact your credit score too.

    New credit

    How many new accounts have you opened recently? This also counts for 10% of a person’s score. This part of the score also takes into consideration how long you have been using credit, the number of inquiries, and how old the most recent account was opened.  Having many new accounts can signal more risk to lending institutions and lower your credit score.

    Next Steps:

    Most lenders want you to have at least a 650-700 credit score. Most buyers can follow the above recommendations and improve their scores significantly within months. If you are not there or feel you need more help to improve your credit score, we have several credit repair counselors we have worked with in the past. Contact us and we would be happy to put you into contact with someone to help.

    If you are considering buying a home, we would love to hear from you.  If you are not ready, please check out our blog for more tips for buyers and when you are ready – we will be here to help.

     

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