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Your Good Credit Rating and FICO Credit Score
A Good Credit Rating Makes It Possible
To Buy A Home and Build Wealth
What is the FICO Credit Score?
When you apply for a loan to buy a house or for any other reason, your lender will get a credit report from one of three credit bureaus. The credit report summarizes your good credit rating. If you have a low credit score your lender will charge a higher interest rate, or may deny you the loan.
Your credit history is monitored by three different companies: Equifax, TransUnion and Experian. These companies are called “credit bureaus.” They compute your credit score, also called FICO score, which is used to qualify loan applicants. The Fair Isaac Corporation (FICO) developed the FICO score in the 1950s and the Federal Trade Commission has approved its use. A great FICO score is 800, but anything over 720 will allow a borrower to be approved. If your score is under 600, you will have to pay a higher interest rate on your new mortgage loan.
How Is Your FICO Credit Score Determined?
For years, determining how credit was scored was a mystery, but here are the fundamentals behind FICO. The score is weighted as follows: 35% is your payment history, with more weight on current history; 30% is your credit capacity, which is the amount of credit available to you; 15% is the length of credit; 10% is the accumulation of debt in the last 12 to 18 months; and 10% is the mix of credit. FICO also takes into account where you live, how much you make and how much you owe. The complete formula is more detailed, but this breakdown gives you a starting point to work on your own credit.
Do You Have a Good Credit Rating?
Get Your FREE Personal Credit Report
Thanks to a change in the Federal Fair Credit Reporting Act, you are entitled to a free copy of your credit report once a year from EACH of the Big Three credit bureaus. To request your credit report, there is a central web site www.annualcreditreport.com. You can also request your credit report by telephone, 877-322-8228. The web sites for the individual credit bureaus are:
- 1. Trans Union Corporation www.tuc.com 1-800-916-8800
- Experian National Consumer Assistance Center www.experian.com 1-888-397-3742 (888-Experian)
- Equifax Credit Information Services, www.equifax.com, 1-800-685-1111
What Will Your Personal Credit Report Tell You?
Your lender may use any one of these three bureaus, so you should ensure that your credit reports from all three are accurate. Order your three credit reports. Then you can compare them, looking for mistakes or any differences. The credit reports may also help you see your financial picture more clearly. There may be a credit card or a line of credit still open that you have forgotten about. You may have opened store accounts that you don’t use any more. Too many store credit cards may reduce your credit score. By law, the credit bureau should remove information about a bankruptcy that is more than ten years old. The credit bureau should also remove ANY other negative information that is over seven years old. You should check that they have done so.
Because identity theft and other credit scams are prevalent, you should stay on top of your credit report. The credit agencies often make mistakes themselves. Your credit report changes daily when banks and businesses report your financial activities to the credit bureaus. You can run a report one minute and get one picture of your personal credit status and then run it a day later and get a totally different picture.
Review your credit history at least every twelve months. You will be able to catch any mistakes, close any unneeded lines of credit, and review your payment habits. The quality of your credit report determines your ability to borrow money for your new home. It is your job to set the record straight if you spot any inaccuracies.
What if You Find a Mistake on Your Credit Report
That Affects Your Good Credit Rating?
Your rights are set forth in the Fair Credit Reporting Act. You should inform the credit bureau directly. There will be a dispute form included with the credit report you received. You can also write a letter to the bureau, or you can file a dispute online or by telephone. If the amount of the mistake on your credit report is substantial, send all your communications by registered letter. The credit bureau then has 30 days to verify the item or to remove the inaccuracy. When the dispute is resolved, request a copy of your revised credit report to verify that the correction has been made. This follow-up credit report is also free.
If you do not hear from the credit bureau, notify them by registered letter that, if they do not contact you within 7 days, you will file a formal complaint with the Federal Trade Commission. You can file this complaint to the FTC online at www.ftc.gov.
When Your Credit Report Shows a Bad Credit Rating, What Can You Do?
If there is a negative item on your credit report, you have the right to provide an explanation that will be included in your credit report. Your information will not improve your credit score, but a lender might take it into consideration.
How Can You Improve Your FICO Credit Score and Good Credit Rating?
Here are some ways you can improve your credit score and credit rating.
- Build credit, if you don’t have any. You should obtain one or two major credit cards, use them and pay them off in full every month. This will establish the line of credit and improve your FICO score. Do not use the cards as an excuse to go into debt.
- Make all your credit payments on time. Pay at least the minimum payment every month. Being late even once will damage your FICO score.
- Keep your debt-to-credit ratio as low as possible. In other words, don’t max out your credit cards. Using the total available credit on your cards lowers your FICO score.
- Don’t try to get a lot of credit at once. Heavy activity makes credit bureaus think you have a cash flow problem.
- History helps. The longer you have credit with people, the more you look like a good risk. So once you get a credit card, keep it open.
Should I Close My Credit Card Accounts
to Get a Good FICO Credit Score and Good Credit Rating?
Intuitively, you would think that closing a credit card account and reducing your access to debt would be a positive step. But credit bureaus think otherwise. It seems irrational, but paying off debt and closing an account is not helpful to your credit score. By closing an account, you eliminate a line of credit and the good history you have built up, and you increase your debt-to-credit ratio. This means that you decrease your credit capacity. Since 30% of your FICO score is based on your credit capacity, closing a credit card account lowers your credit score. Therefore, if you plan to apply for a mortgage loan soon, do not close any accounts.
As we have said, for the purpose of your good credit rating, opening a credit card account is viewed as healthy, and closing an account is scored negatively. However, credit cards must be used with discretion. Credit cards are very profitable for the banks that offer them. Banks know from experience that people will spend more money than they have, accumulate credit card debt and thereby pay late fees and finance charges computed at exorbitant and escalating rates. Credit card companies and retail outlets have brainwashed consumers into thinking that it acceptable to spend money that they do not have. No matter what the ads say, there is no prestige in holding a “platinum” credit card. All that results is a bigger bill to pay at the end of the month.
When your credit report is healthy and your FICO credit score is strong, you are one step closer to owning your first home. Real estate is still the best investment for the average Joe and Jane who want to plan for the future. Owning real estate is the first step to create wealth for yourself.
It is my heartfelt wish that you have a very happy day.
-----Surfer Sam
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