When applying for a mortgage whether it’s for a purchase or a refinance, one of the most important data points is your credit score. Most every available loan program in today’s marketplace does require a minimum credit score and while that minimum score can vary from program to program as well as being raised higher or lower based upon the amount of down payment or equity you have, there’s not too much someone can do when their score falls below what the lender requires. Many times, consumers find out about their credit score status after applying for a loan and are told about their score. When it’s too low, regardless of the loan type, there’s not a whole lot to do except wait for the scores to improve. Or, someone has a good credit score and that person wants to see how a score can get higher.
Credit Score Algorithms
For those with credit scores above 740 they have access to most every program available and can pick and choose which loan they want that best suits their needs. The absolute best interest rates for example are for those with a score above 740. What if someone is at 710 or 720 and the best rates are for those with a score above 740? Or, someone is applying for a loan that has experienced damaged credit in the past and the qualifying score is 614 when the minimum the lender asks for is 620. What can consumers do to get their scores higher, faster?
Credit scores today follow an algorithm developed by The FICO Company and is why lenders refer to scores for mortgage loans as “FICO” scores. There are three categories that credit scores look to when computing a score that ranges anywhere from 300 to 850. The two most important categories contribute 65% of the total score with the remaining three making up the remaining 35%. These two “big players” are Payment History and Account Balances.
Payment history refers to when payments are made to creditors. When a payment is made more than 30 days past the due date, it puts a negative mark on a credit report which makes scores fall. Payment history alone accounts for more than one-third of the total score at 35%. Scores aren’t negatively affected when a payment is made past the due date of a credit account but only if the payment is logged at more than 30, 60 and 90 days past due. That said, the most important thing someone can do, regardless of past credit, is to make sure payments are made before the 30 day period is up. It’s a good thing to make payments on time but it’s also important to realize that scores don’t move one way or the other if a payment is made on the due date or 10 days past the due date. It’s the 30+ date that counts.
Second, credit scores improve when account balances represent about one-third of credit lines. If someone has a credit card with a limit of $300 then a balance of $100 helps scores rise more quickly. It might sound a bit odd but scores will rise faster with a one-third balance compared to someone that pays off the balance each month. This second category accounts for 30% of the total score.
The Takeaway on Raising Your Credit Score
By concentrating on payment history and account balances over the next 60-90 days, scores will be noticeably higher.