The American Dream is becoming a reality for more families than ever before. According to the U.S. Department of Housing and Urban Development (www.hud.gov) over 67.7 percent of Americans are now homeowners. This is the highest homeownership ever. The chances of becoming a homeowner are greatly improved when you know and understand your credit score. Lenders use many factors in determining whether or not to approve a loan and your credit score is one of them. Lenders also look at your income in relation to the amount of your debt, your employment history, and how much money are do you have in reserves in case of emergency. Although your credit score is just one factor in determining if your loan will be approved, it is an important one and it is one that you can improve. Under the Fair and Accurate Credit Transactions Act you are entitled to a free copy of your credit report annually from each of the three national consumer credit companies. A central location has been set up at www.annualcreditreport.com. Here, you can also obtain your credit score (one from each of the companies) for a small fee. Your credit score is a snapshot of your credit history, which changes often. It can also be called your FICO score because the three national consumer credit companies use software to determine the score developed by Fair Isaac and Company. FICO scores range from 300 to 850 and the higher the score the better your chances of obtaining credit. According to myFICO (a division of Fair Isaac and Company) www.myfico.com, the national average is 723. This does not mean that if your credit score is lower than the national average that you will not become a homeowner. There are many loan programs available that allow lower credit scores. You may pay a higher interest rate on your mortgage, but you will achieve the American dream of owning a home. According to myFICO, there are five factors used in calculating your credit score. Your payment history represents 35 percent of the number. This is followed by the amount you owe at 30 percent. The length of your credit history represents 15 percent of your FICO score and any new credit and the types of credit you use represent 10 percent each. Knowing these factors can help you improve your score. Your payment history makes up the largest part of your FICO score. If you want to improve your score it can be as simple as pay your bills on time. If you have missed payments, get caught up. Over time, this will improve your score. The longer you pay your bills on time, the better your score. A factor in determining your credit score is the amount of debt you actually owe versus the amount of credit that is available to you. Hence, paying down your obligations will improve your credit score. You do not want to close your unused credit cards since they will show you have more credit available to you than you are actually using. Paying off debt is good while closing the paid off debt can actually hurt your score. In order to determine a credit history, you must have at least one piece of credit reporting for at least six months. So if you find that you have no credit score, you need to find a way to establish credit for a period of six months. Although you need to watch for various credit scams, there are secured credit cards available that will meet this need. Since your credit score is a snapshot, opening t0o many new accounts in a short period of time will hurt your credit score. This is caused by your average account age being reduced by all the newly established credit. When you apply for credit (i.e. mortgage, auto loan or credit card) the company will look at your credit report. This is called a credit inquiry. Although too many credit inquiries can lower your credit score, opening new credit and paying it on time will improve your overall score. You reviewing your own credit, as long as you are obtaining your credit report from an organization authorized to provide credit reports to consumers, will not affect your credit score. It is better to have credit cards and pay them on time, than to not have any credit at all. A lender will look at a mortgage loan or large installment debt more closely than a small credit card. However, all types of credit, including paid off and closed accounts, are used in calculating your credit score. If your credit score is low, often the best way to raise your chances of becoming a homeowner is by paying your debts on time, and for a period of time. The longer you demonstrate your ability and willingness to pay your obligations, the greater the chances you will be able to achieve the American Dream of homeownership. |
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