Ways to Improve Your Credit Score
The credit score is one of the primary qualifications needed to obtain a home loan. Depending on which loan program you select, there will be a minimum credit score accepted for that loan. In addition to qualifying for the loan, the credit score will also impact the rate and can impact the down payment requirements. Physician’s loans can be very generous with regards to down payments, mortgage insurance and even student loan debt calculations, but you must have good credit in order to qualify for these programs.
The Credit Report versus the Credit Score
There are two pieces to credit, the credit report and the credit score. The credit report is the document that tracks all of your financial information and payments. It will list accounts, balances, collections, and a payment history for each account. The credit score takes the information from the credit report and calculates a score that represents your risk to banks and lending institutions. Information on your report typically remains there for 7 years.
How Is The Credit Score Calculated?
There are a number of scoring agencies and each has a proprietary algorithm which determines how the credit score is calculated. The score you get from a credit card or credit monitoring service may be different from what your lender uses, because of the different agencies.
The most common agency used by lenders is the FICO score. The score can range from 300 to 850. According to MyFICO.com the breakdown of how the credit score is calculated looks like this:
|Length of Credit and Account History
|Types of Credit
Ways to Improve Your Credit Score
The two biggest factors include your payment history and the utilization ratio. Fortunately these are also the two pieces you have the most control over.
Payment History records late payments on your credit report for 7 years. The more recent the late payment is, the more it will impact the credit score. A late payment within the last 12 months can impact the score by as much as 100 points. When you are looking to make a major purchase, like a home, it is very important to be sure that all payments are made on time. The difference between a 600 score and a 700 score is the difference between approval and denial.
The other piece of payment history is any collections or delinquent accounts. Companies like utilities, phone companies and even doctor bills do not show up on your credit report unless they are late. Simply paying the account off will result in the account being changed from delinquent to paid, but will remain in the credit report for 7 years, after the bill has been settled. If you negotiate the accounts removal from your credit report prior to paying it off, the account can be removed when the account is settled.
Utilization refers to the amount of revolving credit that is available versus how much is used. Revolving credit includes credit cards and other revolving accounts. It is best to keep credit card balances 30% or lower than the available credit. For example if you have a credit card with a $10,000 limit, keeping balances below $3,300 (30%) will provide the best score.
If your score is borderline, when qualifying for a home loan, it is worth discussing options with a lender. It might be better to pay down debt to raise your score and improve your debt to income ratios. Physicians’ loans offer borrowers low down payment options which may allow you to pay down debt and still qualify for the loan. Discuss any strategies to reduce debt with your lender before paying down accounts. They can help determine which options are best under your specific circumstances.
Do not apply for or incur new debt. Within 90 days of applying for a home loan do not apply for any new credit or add to credit balances. Doing so could jeopardize the home loan, even after the application has received a preliminary approval. Just before the home closes the lender will obtain a new copy of the credit report to ensure there are not changes to the debt or credit score. Adding debt could change the debt to income numbers or could lower your score, turning an approval into a decline.
Managing credit is an important part of financial management, but is especially important when you are trying to qualify for a home loan. The programs that are offered in the form of physicians loans give generous options for home buying, but are still based on your credit score and payment history.
You can get a free copy of your credit report by going to www.annualcreditreport.com. This is a free website that offers a free report every 12 months from each of the three credit bureaus. You can purchase your score for a few dollars. Several credit cards now offer your credit score on your monthly statement. When applying for a home loan the bank will pull credit from all three bureaus. Taking a look at your report and ensuring its accuracy will help you qualify for the best loan possible.