FAIR CREDIT REPORTING

Credit Scoring

How to increase a personal credit score

Increasing one’s personal credit score is a long-term process. Following are some of the most important steps to a better credit score:

  • Pay bills on time. Late payments and collections can have a serious impact on the FICO score.
  • Do not apply for credit frequently. Having a large number of inquiries shown on your credit report can lower the score.
  • Reduce credit card balances. Persons who are “maxed out” will find their score declines.Do not apply for credit frequently. Having a large number of inquiries shown on your credit report can lower the score.
  • Be certain to obtain enough credit to establish a credit history. Not having sufficient credit can negatively impact the score.

Freddie Mac has found that borrowers with credit scores above 660 are likely to repay the mortgage, and underwriters can do basic reviews of the files for completeness. For applicants with scores between 620 and 660, the underwriter is required to do a comprehensive review. A very cautious review would be made for persons with credit scores below 620.

Another important scoring system, VantageScore, was introduced in 2006 by the three credit-reporting agencies, Equifax, Experian, and TransUnion. All three use the same formula to calculate the score, unlike the FICO system, wherein each credit bureau uses a different formula. The formula differences are slight. The VantageScore system grades from “A” (best) through “F.” More than 200 lenders are currently testing VantageScore as a primary scoring method, but none have switched from FICO yet. FICO’s stock price dropped 6 percent the day VantageScore was announced. The credit bureaus will profit most if the new standard becomes generally accepted.

Borrowers who are quoted higher-than-market rates should shop among many lenders for the best terms. If borrowers had access to their scores and more knowledge of the lending process, they could obtain better loans. In this endeavor, a real estate licensee can be very helpful.

While most consumers have full credit bureau reports used by lenders to evaluate credit risks, approximately 54 million Americans (young people, recent immigrants, or newly divorced or widowed consumers) have no reports on file. Because these situations make it difficult to qualify for mortgages, FICO has developed a new credit score program that lenders may elect to use. This program evaluates “nontraditional” data, such as how well consumers handled payday loans and retail payment plans. The FICO score will also review how responsibly individuals used their checking accounts’ overdraft protections.

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