Know The Facts About Your Credit Score When Shopping For A Mortgage

By Michael G. MacKenzie, November 24, 2007
Executive Analyst, Community Acceptance Mortgage

Your credit score is a number, (usually between 300-850), used to rate how risky a borrower you are; the lower the score, the greater the risk you pose to creditors. Most mortgage and credit card lenders use credit scores when making lending decisions. A low credit score may result in a denial of credit and lenders will charge higher interest rates on loans to individuals with lower scores. This practice is known as risk-based pricing.

Individuals with high credit scores get superior interest rates to those with lower scores. And individuals with lower credit scores are often targeted with sub-prime loans and pay higher interest rates. For example, individuals with top credit scores might pay about 5.5 percent for a $100,000 mortgage with a monthly payment of $567. If extended credit at all, an individual with a credit score under 559 could pay over 10 percent for the same mortgage, carrying a monthly payment of over $890. Over the course of a thirty-year term, that's about $111,500 in extra interest!

Furthermore, sub-prime and predatory loans are disproportionate among minorities. And, if an individual has a sub-prime loan on their credit report, it can damage their credit score. The lower score in turn, attracts more sub-prime loans, resulting in a vicious cycle.

UNDERSTANDING YOUR CREDIT PROFILE TO IMPROVE YOUR CREDIT SCORES.

Equifax™, Experian™, and Trans Union™ dominate the world of Credit Reporting Agencies. Each uses a different model for credit scoring. Credit scoring models are developed by analyzing statistics and picking out characteristics that are believed to relate to creditworthiness. Credit Reporting Agencies use different scoring models for different purposes. Generally, credit scores are calculated by analysing a combination of factors including: payment history, outstanding debt, credit account history, recent inquiries, and types of credit.

The first step in managing your creditworthiness is to get a clear picture of your credit profile. Study the data from the top three credit bureaus to make sure all the information is accurate. In the event of discrepancies, send letters of dispute to the credit-reporting agency to have errors on your credit profile corrected. Also, don't hesitate to consult your mortgage specialist who can provide guidance and if needed, refer you to credit repair specialist.

FIX AND MAINTAIN A HEALTHY CREDIT PROFILE

IDENTIFY PROBLEM AREAS on your credit profile and make a plan for improvement. For example, if you've had a hard time paying your bills on time, sign up for an automated payment service. If your debt levels are above 45% of your available limit, create a payment plan to reduce your balances. Set goals for improving your credit and reward yourself when you reach a milestone.

TO KEEP YOUR CREDIT HEALTHY, sign up for a Credit Monitoring service which will help you stay aware of any changes in your profile. If any disputed inaccuracies persist, contact the creditor and try to have the item eliminated from your credit profile. If you want to tell your side of the story, send a written request to the Credit Reporting Agency to have a consumer statement added to your credit file. Keep copies of your old credit profiles and letters of dispute in a safe place for future reference. Plan to evaluate your progress quarterly.

EACH INQUIRY MAY REDUCE YOUR CREDIT SCORE. However, multiple inquiries within a short amount of time, like when you are shopping for a mortgage, are grouped together to lessen the impact. The actual impact depends on the number of inquiries, time period and other factors on your credit profile.

CONSOLIDATE HIGH INTEREST CREDIT CARD DEBTS into one lower interest account. However, avoid combining debts onto a new credit account with a resulting balance above 45% of the available limit. Check your credit profile frequently while moving these debts to make sure that everything is being properly recorded.

Taking a proactive approach to the management of your credit profile can save you tens of thousands of dollars over the course of your lifetime. And it is never too late (or too early) to start!

 

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