We’ve all heard that awful singing about FreeCreditReport.com on TV commercials. But if you are like me, you may not know why getting a credit report matters, even if it is free!
Good credit reports are critical for today’s homebuyers. They need good credit to get approved for loans which are harder to come by these days with more stringent lender standards.
So how do you determine your credit score and go about improving it before you borrow from the bank for a home loan?
The FICO credit score, the most widely used credit model in the U.S., is determined by the ratio of credit used to credit available. Mortgage lenders use the FICO risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender.
FICO credit scores range between 300 and 850. Less than .5 percent of the American population is able to obtain a perfect 850. Credit ratings are usually classified as follows:
Excellent: Over 750
Very Good: 720 or more
Acceptable: 660 to 720
Uncertain: 620 to 660
Risky: less than 620.
Credit scores are determined by factors such as: payment history, balances on credit lines and loans, length of credit history, recent credit requests, and the types of credit accounts.
A good credit score can mean lower interest rates for a borrower thus saving him or her tens of thousands of dollars over a lifetime.
On a $300,000 30-year fixed-rate mortgage, the most credit-worthy borrowers will pay $14,200 less than those one tier below, $25,600 less than those two tiers below, according to CNNMoney.com.
That’s a lot of money homeowners can put back in the bank as savings!
