Your FICO Credit Score for free from Discover

September 8, 2015

You’ve probably seen the Discover commercials where a person finds their credit score on their statement and calls in to ask about the new score on their bill.

It makes sense that credit card companies would make this available to their customers; I’m surprised that more of them don’t. Now that Discover and a few others have set the precedent hopefully more banks will follow suit.

Of course you can see your credit report for free once a year but a credit report isn’t your credit score and your free credit report isn’t intended for the purposes of monitoring your credit.

Credit Score Changes
The nice thing about seeing your credit score on a monthly basis is it can alert you to any big changes. If you’re paying your bills on time and not opening up more lines of credit then your score shouldn’t really change that much from month to month. But if you do see a big change then it can alert you something isn’t right.

Missed Payments
When you miss a payment it’s typically not reported to the credit agencies right at the end of your billing cycle. When the next bill is due if you haven’t caught up on your payments then the late payment appears on your credit report.

The later your payment is, the bigger impact it has on your credit score. A 60 day late payment is worse than a 30 day late payment and a 90 day late payment is worse than a 60 day late payment – so the sooner you realize you missed payment and correct it, the better for your score.

Automated Payments & Alerts
This is why I like using automated bill pay; to make sure my bills are paid on time and to alert me if one of them isn’t. However, technology isn’t perfect. There have been times when online bill pay has had hiccups.

Most major credit cards offer alerts that will notify you about events like an upcoming bill due or when a bill is overdue. However, there are things you might not be able to get alerts for like your mortgage or car payment.

As I mentioned above by the time you miss a payment and it’s reflected on your credit score some damage has already been done. However, the sooner you catch it the better.

Credit Score Monitoring
There are credit monitoring services that will keep an eye on your score for you, most of them charge some type of fee. If you don’t want to pay for updates then the credit score on your monthly Discover it ® card statement can be another way to stay on top of your credit score. Discover allows you to view 12 months of your FICO® Credit Score for free as well as key factors in why it has changed over time.

This post is published as part of the Discover Preferred Blogger Program.

How to Improve Your Credit Score by Focusing on Payment History and Reducing Credit Card Debt

November 10, 2014

Credit ScoreOne of the things that many consumers are obsessed with today is a better credit score. After all, your credit score influences more than whether or not you qualify for a mortgage, or whether you get the best interest rate on an auto loan. Your credit score can also impact the insurance premium you pay, or what happens when you sign up for cell phone service.

There are all sorts of “tricks” out there for improving your credit score, but really it just boils down to a couple of basics:

  1. Manage your payment history
  2. Pay down credit card debt

If you make payments on time and pay down your credit card debt, you will likely have a decent enough credit score to accomplish just about anything you want.

Payment History and Your Credit Score

Most credit scoring models heavily weight your payment history. “Payment history accounts for 35 percent of a consumer’s FICO credit scores,” says Michelle Black, a credit expert at, a credit education and restoration program.

This means that if you want to get off to a good start, you need to make your payments on time. If you make all of your loan payments on time, they will be reported positively to the credit bureaus. Missing a payment, or paying late, can mean a lower score. The longer you miss payments, or the more late payments you have, the bigger the effect on your score. One late payment isn’t going to be the end of the world, but there is a cumulative effect once you start piling up the late payments and missed payments.

Even your non-credit payments can impact your credit score. While making your utility payments on time won’t have a net benefit to your score, missing your payments can be negative. Your company can report the missed payments to the bureau, or turn your account over to collections, which is viewed negatively and can drag on your score.

Credit Card Debt

However, it’s important to note that the amount of your credit card debt can also have a big impact. Credit utilization accounts for about 30 percent of your FICO score, and if you have a high ratio of credit used to your available balance, it can mean a disappointing score, even if you make your payments on time.

“Paying down credit card debt is the single most actionable way for a consumer to see an improvement in their credit scores,” says Black.

Many credit experts suggest that you keep your revolving credit card utilization to less than 50 percent – and it’s ideal if you can keep it to less than 30 percent. This means that if you have available credit lines on your cards amounting to $5,000, you should try to keep the amount that you carry to $2,500 (50 percent), or to $1,500 (30 percent). If you want to see a solid improvement in your credit score, paying down high credit card balances can be one of the most effective ways to go about it.

In any case, maintaining a good credit score isn’t about sudden moves. Over time, you are likely to see the best results if you practice good financial habits, keeping your revolving credit balances relatively low, and making sure that you make your credit payments, and other bill payments, on time.

Do you need to improve your credit score? How are you going to go about doing so? Leave a comment!

4 Mistakes That Can Drag Down Your Credit Score

January 24, 2014

Credit ScoreCredit scoring has become big business. There are a number of scoring algorithms that can impact the way financial service providers see you. Your credit score influences decisions about whether or not you should get a loan, as well as whether or not you should have favorable terms when you are approved for a loan.

Not only that, but there are instances when your credit score can impact your insurance premiums and other aspects of your financial life. As a result, it’s important for you to do what you can to keep your score in good shape. Unfortunately, we’re all prone to blunder. Here are some of the mistakes that can drag down your credit score:

1. Missing Non-Credit Bill Payments

Most of us know that missing credit payments, like those for credit cards and mortgages, will result in lower credit scores. However, some consumers don’t realize that even their non-credit accounts can have an impact. If you miss utility payments, or you don’t pay your medical bills, those accounts can be turned over to collections and reported to credit bureaus.

2. Maxing Out Your Credit Cards

It seems as though it wouldn’t matter how much you have on your credit cards, as long as you pay at least the minimum on time, and you don’t go over your credit limit. However, this isn’t the case.

When you carry high balances, you are causing severe damage to your credit score. Many credit scoring models use your credit utilization – the percentage of available credit you are using – as one of the top three factors that influence your score.

You’re better off keeping your credit card balances to below 50 percent of your available credit, and it’s even better if you can keep it to under 30 percent of your available credit. Best of all, though, is if you pay off your card each month to avoid falling into the debt trap.

3. Canceling Credit Cards

Some consumers get excited about canceling credit cards, especially as they pay down debt. Unfortunately, this can affect your credit score in a couple of ways.

First, you are reducing your available credit. If you still have balances on other credit cards, your total credit utilization has just been impacted.

Second, you are reducing the length of your credit history. Many credit scoring models look at how old your accounts are. Canceling an account, especially one you’ve had for awhile, can lower your credit score.

4. Assuming All Loans are Created Equal

A credit card is a credit card, right? Not exactly.

Most credit scoring models take into account the type of credit account you have. A credit card issued by a retailer, and not usable outside that retailer, is considered less positive than a credit card issued by a major bank. Likewise, a payday loan can actually negatively impact your score in some cases, while a car loan (if you make all your payments on time and in full) can be good for your credit score.

Pay attention to the type of account you are getting, and where the debt comes from. You’ll be able to better protect your credit score.

What are some other mistakes that can drag down your credit score? Leave a comment!

Improve Your Credit Score in 5 Simple Steps

January 9, 2014

credit scoreImproving your credit score can be simple if you know what steps to follow. If you have poor credit, bad credit, or simply want to improve your credit score, there are specific steps you can take to make it happen. Your credit score is computed mainly using:

  • Payment history
  • Type of credit you have
  • Length of your credit history
  • Your outstanding balances
  • New credit you’ve established

Each of these items is weighted differently, but tweaking all of them can play a role in increasing your credit score. If you can take these steps you should see your credit score improve.

1. Make payments on time and pay down your balances.

The biggest contributor to your credit score is your payment history. This means that if you do nothing else, you have to make your payments on time. Find a payment system that works for you and make sure your payments are received on or before the due dates.

It also helps to pay down the balances of your outstanding debt. This doesn’t mean paying off the debt completely. It’s about your ability to manage your debt, so making payments that reduce your outstanding balances also raises your credit score.

2. Leave your credit accounts open.

The longer your relationships with creditors or lenders, the better off your credit score is. Do not fall into the trap of closing unused accounts or completely paying off credit and loan accounts thinking it will increase your credit score. Leave your credit accounts open, if you don’t use them.

The longer your credit relationships are, the higher your credit score. It’s important to note that you also have to have a good relationship – a good payment history – combined with the longevity of your relationship with the creditor.

3. Diversify the types of credit.

Again, your credit score is an evaluation of your ability to manage your credit, so another way to give your credit score a boost is to diversify the types of credit and loans you have. A good mixture of credit cards, mortgages, car loans, and student loans – a variety of credit – illustrates your ability to manage various types of credit. If you only have one type of loan, apply for different types of credit to diversify your mix.

This doesn’t mean run out and start applying for various types of loans, but apply where appropriate. For example, when you buy your furniture, apply for the furniture store credit account instead of buying it with your credit card or paying cash. You can then simply pay off your store card with your cash.

4. Clean up your bad credit.

Review your credit report at least once a year. Look for negative items such as late payments, collection accounts and discharges – all items that drag down your credit score. If these items appear on your credit report and they are accurate, make arrangements with the creditors to pay off this bad debt.

If these items appear on your credit report but are inaccurate, dispute the items with the credit agencies to have these items removed. Over time, getting rid of these negative marks on your credit report increases your credit score.

5. Create new credit.

As much as your credit score depends on long-term credit history, it loves new credit too. Applying for new credit once in awhile also gives your credit score a boost. Combine your application for new credit with diversifying your mix of credit and you can accomplish two goals at once.

Credit scores can seem complex at times but since they’re determined by a formula that means there’s a formula you can follow to help improve your credit score.

Before you make any changes, get your free credit report so you can see where your score stands today. Then start working on these five steps and you should see your credit score increase over time.

Can you think of additional ways to improve your credit score? Leave a comment!

This article was originally published May 16th, 2009.

Credit Score Improvements: What You Should Know

January 1, 2014

credit scoreAs technology advances, and as credit score algorithms become more sophisticated, efforts are being made to measure more consumer behaviors, and to include the more subtle shadings of consumer credit use.

Changes being made to scoring models, as well as inclusions of non-credit data in your credit report, might help financial service providers get a more accurate picture of what sort of credit risk you really are.

Experian to Start Tracking Rent Payments

One of the major credit bureaus, Experian, has announced that it will start tracking rent payments. Those who make regular rent payments are not being recognized for their financially responsible behaviors.

Even though landlords can report them to credit bureaus when they are late paying, or skip a payment, there has not been a system in place to report on-time payments. This is changing with Experian’s RentBureau. Positive rent data could be a help to a consumer who is responsible, but who doesn’t have mortgage payment to help boost their credit profile.

FICO Expansion Score

In addition to being the foremost in credit scoring, FICO is also trying to widen its range offerings when it comes to consumer credit behavior. The company now offers the Expansion Score. The FICO Expansion Score factors in such items as rent payments, utility payments and other regular bills. This product also manages your checking account, so a bounced check can reflect on your consumer credit profile.

PRBC Reporting Agency

If you are interested in a credit reporting agency that focuses on non-traditional indicators of fiscal responsibility, you can consider the PRBC reporting agency. This agency collects information on bill payments, rent payments and more, and uses it to put together consumer credit reports.

PRBC makes use of the FICO Expansion score as well. However, you will have to request that the companies you work with report your good payment habits to PRBC; it doesn’t just happen.


On top of consumer credit profiles including information that isn’t normally considered to be “credit related,” it is worth noting that FICO has been tweaking its formula. FICO 8 is gaining popularity (even though it was released nearly two years ago), and it contains some new items that can help you improve your credit score.

Instead of penalizing you heavily for one-time missed payments, the new FICO score takes into account the fact that isolated late payments happen. If you have a generally good payment history, one missed payment won’t damage your credit score as much (although there will still be some damage done).

Additionally, FICO 8 will no longer take into account small collections. If the original balance was $100 on a bill that goes to collections, the new credit scoring model will disregard it. This should help consumers who might have forgotten about a small bill, or if a payment falls through a crack. FICO 8 is more forgiving in some ways.

Of course, some of the tweaks to FICO 8 will hurt consumer credit scores. The main downside to FICO 8 is that high amounts of debt can be more damaging. If you are close to maxing out your credit cards, it will have more of a negative impact on your credit score.

In the end, the quest is to reduce your financial habits down to an accurate number. In order to do that, credit agencies and credit scoring model developers seek to include more information.

Were you aware that the credit reporting agencies make these types of changes with time? Leave a comment!

This article was originally published March 2nd, 2011.

Why a Good Credit Score Matters When You’re Not Borrowing

November 20, 2013

credit scoreWhy does a good credit score matter if you’re not planning to borrow any money? Many of us think that, as long as we already have a house and we pay for our cars in cash, a good credit score doesn’t matter that much.

Unfortunately, that’s just not the way the system works anymore. Your credit report is a convenient compilation of your financial habits and history, and it is easy to use the information in your credit report – or even to use your credit score – as an indication of what sort of risk you might pose in a number of financial situations.

Anymore, an increasing number of people are making judgments about you based on the information found in your credit report. You may rankle at the injustice, but it’s still there. Here are some of the ways that having a bad credit score can hurt you – even if you don’t want to borrow anything:

Opening a Bank Account

Believe it or not, there are actually some financial institutions that will run a credit check on you before allowing you to open a deposit account. Before you can open a savings account or a checking account, you might have to submit to a credit check.

Banks want to know, especially in the case of savings accounts, that you are likely to park a big chunk of money there – and leave it for a while. Plus, even though overdraft fees are a big moneymaker for banks, they don’t want someone who habitually goes in the red, and your credit report could provide a clue.

Insurance Premiums

Many insurance companies check your credit score when deciding on your insurance premiums. My insurance company regularly sends me a letter telling me that my credit score has resulted in a discount on my car insurance premium.

Over time, a good credit score can mean hundreds of dollars saved in car insurance premiums. If you don’t pay attention to having good credit, then there is a good chance that it will cost you.


What landlord wants to have to worry about whether or not you are going to make your monthly payments on time? As a result, some landlords will check your credit before approving your application.

In some cases, you might have to live in a less desirable rental if you don’t have good credit. (Of course, if you already have a home, this doesn’t matter as much.)

Certain Jobs

My brother in law was subjected to a credit check when he applied to be a security guard. He was rejected because some companies have concerns that someone with poor credit might be vulnerable to bribes.

Certain employers might want to take a look at your credit report before hiring you. If it looks as though your habits might not have been the most responsible, you might be passed over.

Building Your Credit

It’s frustrating for people who are trying to be financially responsible and avoid debt of any kind to find out they don’t have a good credit score since they have no credit history. The good news is you don’t have to go into major debt to build your credit score.

One option is to start using a credit card, and pay off your balance monthly. If you only charge what you have money to pay for it can help you improve your credit score while at the same time keeping you debt free.

Another option is to use secured loans to build up your score. Banks may not be willing to give you a regular loan if you don’t have a credit history. What you can do is deposit $1,000 into a 12-month CD, then use the CD as collateral for a secured loan.

What are some other possible reasons why a good credit score matters when you’re not borrowing? Leave a comment!

This article was originally published October 28, 2011.

What is the Difference Between a Credit Report and a Credit Score?

November 19, 2013

credit report and credit scoreWhether you are buying a home or looking for a quote on your auto insurance, chances are that someone is going to be checking your credit. Sometimes this means looking at your credit report, and sometimes it means looking at your credit score.

Sometimes it means looking at both.

It’s easy to get a little mixed up on the difference between a credit report and a credit score. Here are the basics of what to expect when your credit is considered:

The Credit Report

Your credit report is a history of your credit transactions. It is a compilation of the financial transactions you have made involving borrowing money. Your credit report includes information about your loans as well as information about which companies are making inquiries about your credit situation. Detailed information about your borrowing is shared including:

  • Who gave you the loan.
  • How long you have had the loan.
  • The amount of the loan.
  • The credit limit (for revolving credit).
  • The payment history, including your monthly payment record for credit cards.
  • Whether the loan has been paid off.

Additionally, when companies make hard inquiries into your credit, they show up on your credit report, indicating that you are applying for credit right now.

Your credit report might also include information about past and current employers (although this information doesn’t influence your score) as well as your name and aliases, and your current and past addresses. All of this information can be taken into account when making decisions.

Special versions of your credit report might be prepared for different purposes. For example, some employers might ask to look at your credit report. A version of your credit report showing certain information is supposed to be sent to your employer. Then, that information can be used to make a hiring decision. When you buy a home, your full credit history is likely to be combed over.

Credit Scores

Unlike a credit report, which spells out your entire credit history, a credit score is three numbers. However, the credit score is based on the information in your credit report. All of the information in your credit report is converted into a form that can be fed into a special algorithm. Different weights for different portions of your credit history are used. All of this information is plugged into a formula, and the result is your credit score.

There are different versions of your credit score, depending on what information is used. If your Equifax credit report is used, it might have different information from your TransUnion credit report, so your Equifax credit score will be different from your TransUnion score. The credit scoring giant FICO has a number of variations that it uses to emphasize different aspects of your credit report. Even individual banks sometimes have their own models.

Your credit score is a way to get an idea, at a glance, of your credit situation. It helps when making decisions about whether to approve you for a loan, and what terms you will receive if you are approved.

Credit scores are often used with car loans, since it makes it quick and easy to see what you qualify for. Others, like insurers, may use credit scores to get an overall idea of your level of responsibility and make a decision about your premium.

The main thing to remember is that your credit score is based on the information in your credit report. If you are careful with your credit report, you are more likely to have a higher credit score.

What other questions do you have about your credit score or credit report? Leave a comment!

This article was originally published October 29th, 2012.

How Does a Loan Affect Your Credit Score?

May 8, 2013

credit scoreYou just completed the paperwork on a new loan. Because of your excellent credit score, you got an outstanding rate on the loan. But 30 days later you pull your credit report and find out that your credit score dropped by 40 points. Everything else on your report is consistent with what has been there before, the only difference is the new loan.

Did that cause your credit score to drop? And if so, why?

Unproven Payment History

If you are not fully familiar with the credit universe it can be a shock to find that a new loan will cause your credit score to drop. That is actually more common than not.

When you take a new loan, there is no payment history on the loan. While we might assume that a new loan should be neutral in terms of credit score – after all, you haven’t missed any payments yet – credit repositories take the position that a new loan represents a new risk.

Even though both you and the lender are extremely comfortable with your ability to pay the loan in a timely fashion, credit scores are a measure of risk – and new loans add plenty of it.

It actually makes sense. Let’s say that your total monthly debt payments are $1,000. That’s everything – car payment, student loan payment and credit cards. But you decide to buy a second car with the payment of $400 per month. Your monthly obligations will rise by 40%, and there is no payment history at that level of debt to indicate that you will be able to do that successfully.

The credit scoring models are assuming the worst here, but when you look at it as described above, the additional debt is a negative and that has to be reflected in your score.

Number of Loans Outstanding

Credit scores also reflect the number of loans you have outstanding. If you already had six loans with outstanding balances, and you add one more to the mix, you now have seven loans with outstanding balances.

The credit scoring models consider the additional debt to be an additional risk, and therefore it is a ding against your credit score.

Credit Utilization

Credit utilization measures the amount of credit you have outstanding to the amount of credit limits you have in available. For example, if you have a $10,000 credit line, and $6,000 of it is outstanding, your credit utilization is said to be 60% ($6,000 divided by $10,000).

The lower your credit utilization is, the more positive it is for your credit score. And obviously, the higher it is the more negatively it impacts your score. When your utilization gets up around 80% or higher, the negative impact is more severe.

Credit utilization is more pronounced among revolving lines of credit, which is mostly credit cards. But it is also likely that an installment loan will also have a negative impact while the outstanding balance is at or near the original loan amount.

Different Loans, Different Credit Score Impacts

The type of loan that you have is also a factor. For example, a new mortgage loan will generally not have as much of a negative impact as say, a new auto loan. There is actually a hierarchy within the credit scoring models as to loan type, and mortgages are at the top (seen as the least risky debt type).

Next in line are auto loans, followed by credit cards, and at the bottom of the heap are consumer installment loans, such as loans for furniture and such.

That being the case, taking a new loan to buy a computer, will have a greater negative effect on your credit score than taking a new mortgage.

Good News: “Seasoned Loans” have a Positive Effect

So far we been discussing the negative impacts of a new loan on your credit score. But there is light at the end of the tunnel.

The longer your loan has been outstanding, and the longer you have been making timely payments, the greater the positive impact will be. Yes, your credit score will drop upon taking a new loan, but as time passes the effect of the loan will go from negative to positive.

For example, if you take an installment loan for 60 months and you are halfway through, the payment experience on that loan will be a positive factor for your credit score. Lenders refer to mature loans as “seasoned loans” – they’ve been around for a while, there’s a readily identifiable pay history, and the payments have been made on time.

This is why people who have long credit histories usually have better credit scores than those who are fairly new to the credit world. A pattern of paid and almost paid loans has a major positive impact on your credit score.

So if you are worried about the new loan dropping your credit score, just sit back relax and make your payments on time – it will all start working in your favor soon enough.

Have you ever experienced a credit score drop after taking a new loan? Leave a comment and tell us about it!

What is a Good Credit Score for Buying a House?

October 26, 2012

Credit Score

Getting a mortgage today is still difficult. Guidelines are tight, and credit scores matter more than ever. Before applying for a mortgage, there are a few things you need to know about credit scores.

Acceptable Mortgage Credit Ranges

Believe it or not, there’s no single (or simple) answer here! The credit score range varies depending upon which mortgage agency is funding the loan, the type of loan you’re applying for, and also on specific lender guidelines.

On conventional fixed rate mortgages, the ones typically handled through either Fannie Mae or Freddie Mac, the minimum acceptable credit score is generally 620. On a conventional adjustable rate mortgage (ARM), it’s generally 640 as a minimum.

For loans insured by the Federal Housing Administration (FHA), the absolute minimum credit score is 500. You’ll need a minimum score of 580 in order to qualify for maximum financing (96.5% of the purchase price of the home). Between 500 and 579 you can qualify for a mortgage of up to 90% of the property value.

It’s important to remember that these are the minimum scores of the mortgage agencies. The individual lenders you’ll be working with may have credit score minimums that are set at higher levels.

Getting the Best Rates and Loan Terms

Mortgage lenders price loans using a matrix based on a mix of risk factors that includes loan-to-value ratio (mortgage loan amount divided by property value), credit scores, loan amount and debt-to-income ratios. They may even have different requirements based on geography.

Generally speaking, the higher your credit score, the more likely you’ll be to get approved and with the lowest interest rates and most flexible terms. There are thresholds above which your credit qualifies as “good”, “very good”, or “excellent”.

Depending on the lender and loan program, excellent credit scores can begin anywhere between 700 and 750. If you’re above those thresholds, you’ll generally get the best loan pricing available.

Refinances Can Be More Flexible

Largely due to the decline in property values in recent years, most lenders are offering “streamline refinances”, which are basically mortgages without so much of the usual documentation required. They generally work best for homeowners who are doing a simple rate and term refinance, so credit scores aren’t as much of a factor.

Not all refinances qualify as streamline refinances either, and that’s where credit score requirements re-enter the picture. For example, the game changes if you want to consolidate existing first and second mortgages into a new first mortgage. Another example is when you want to refinance a bank mortgage with a Fannie Mae or Freddie Mac loan. The usual credit score requirements are likely to apply in these cases.

Non-Traditional Credit

Some borrowers have no credit scores, and there are mortgages for them as well. It’s referred to as “non-traditional credit”, which is to say that it’s for people who either don’t have credit from the usual sources, like mortgages, installment loans or credit cards. Because there’s no credit, there are no credit scores.

Sometimes a non-traditional credit report can be ordered that will show your payment history (but no credit scores) from third parties, like utility and insurance companies. This option however is not available in all situations.

If not, you generally will have to produce evidence in the form of canceled checks for your rent and two or three other sources, like utilities or insurance payments. The canceled check requirement will typically call for you to provide evidence of on time payments for up to two years. If you go this route, be sure you have all 24 months worth of canceled checks. If you’re missing even one the lender may assume that you paid late that month.

An important note here is that non-traditional credit is not an option for borrowers with low credit scores. They’re strictly for people who have no credit scores at all.

Getting a Mortgage With a Lower Credit Score

Generally speaking, if you’re below the credit score minimum requirements you will not be able to get a mortgage. If you’re in the “fair” or “average” range (620-700 for conventional or 500-579 for FHA) you’ll most likely be able to get a loan, but it will have higher rates and less generous terms.

As mentioned above, FHA limits loan amounts to 90% of property value in the 500-579 range, but conventional loans have their own restrictions. You may similarly be restricted on your loan-to-value (90% or less) or your ability to take a second mortgage, but your interest rate will likely be higher as well. Lower credit scores may also restrict you to lower debt-to-income ratios, which will have the effect of decreasing the loan amount you can take.

There are two ways to get around the lower credit score issue. One is to work to improve your credit score, and the other is to have “compensating factors”.

Compensating factors is a mortgage industry term for components of your borrower profile that are strong enough to offset weaknesses in other areas. If your credit scores are below the most desirable range, you may not be able to improve your loan pricing, but compensating factors could mean the difference between an approval and a decline.

Typical compensating factors include:

  • A large down payment (usually 20% or more)
  • Cash reserves after closing, equal to six months or more of your new house payment
  • Buying less house than you can afford (giving low debt-to-income ratios)

In today’s difficult mortgage lending environment, it’s usually best to do both — improve your credit score and have compensating factors. It’s a tall order, but one that will benefit you for many years in your home.

Have you recently had credit score issue with your mortgage application? Leave a comment!

What is a Good Credit Score Worth?

December 9, 2011

What’s a good credit score worth?

A good credit score is vital for loan approval and can help you borrow at lower interest rates.  Depending on how much you borrow a good FICO credit score could be worth hundreds or thousands of dollars.

What is a good credit score?

A good credit score falls in a range of 675 – 850, the strength of the score depends on which credit scoring system you’re using.

Good Credit Score Range

Before you get a handle on what is a good or high credit score, you first need a basic understanding of how the scoring goes. FICO, which is the primary credit score that lenders around the country use, starts at 300 and goes up to 850. A good FICO score starts at 675 and goes to 699. A very good credit score picks up at 700 and goes to 799. An excellent credit score ranges from 800 to 850.

Prior to the downturn in the economy and stricter lending guidelines, a good credit score could get you far. A good credit score could get you an auto loan, mortgage or credit card, with favorable terms and a fair interest rate. Since the downturn in the economy and the stricter lending guidelines, your credit score has to be higher to get approval from some lenders.

Journey to a Good Credit Score

The calculation of your credit score has of five components: payment history, balances, credit history, types of credit and new credit. Each component has a higher weight than the one that follows it, so these are in order of importance. If you want to boost your credit score into the good, very good or excellent category, then these five components play a vital role.

1. Payment history (35%)

The primary way to boost your credit score is always make your payments on time.

2. Balances (30%)

The second way to boost your credit score is to maintain manageable balances on your credit accounts. If all of your credit cards are at the limit, then pay down or pay off the balances. Maintaining a manageable debt level is another boost to your score.

3. Credit history (15%)

Time is on your side when attaining a higher credit score. When you have long and positive relationships with your creditors, this boosts your credit score. Avoid opening and closing credit accounts and loans. Instead, maintain your account and credit relationships.

4. Types of credit (10%)

You should also vary the types of credit accounts you have. Having a mixture of credit cards, auto loans, student loans, mortgages and store credit accounts can help. You can attain a good credit score more easily if you have a mix of credit account types.

5. New credit (10%)

Finally, establish new credit accounts once in awhile. If you do not have a combination of different types of accounts, this is an opportunity to open a new account using a new type of credit.

What’s a Good Credit Score Worth?

Your credit score may actually be used as a criteria for more than approval for a car loan or home loan these days. In some cases employers, rental agencies, and insurance companies may check your credit score before hiring you, renting to you, or writing an insurance policy for you.

The impact of these uses are hard translate into dollars since your credit score isn’t used in all cases and we don’t know how exactly its being used.  Just be aware that the value of a good credit score goes beyond approval and interest rates on loans.

It’s not simple to say for sure how your credit score will impact your loan application since there are different credit scoring systems and lenders use other criteria in addition to your credit.  One thing’s for certain, the more money you’re borrowing, the more you’ll pay in interest. So your credit score often has the biggest bottom line impact on a home loan.

You can get an idea of how much a good credit score can save you, or a bad credit score can cost you, from the credit score calculator on the MyFICO site.  Below is a snapshot of the estimated monthly payments for each credit score range on a 30 year fixed mortage of $300K.

FICO Credit
Score Range
Monthly PaymentMonthly Savings
760-850$1,520 $39
700-759$1,559 $32
680-699$1,591 $40
660-679$1,631 $80
640-659$1,711 $104

As you can see the savings from one credit score tier to the next is significant. If you compare the best credit score tier to the worst credit scores you’re looking at almost $300 a month difference.

Bad Credit?
If you’re in the bottom tier of the table you’ll obviously have to pay a higher interest rate, which means thousands of dollars over the life of your loan. Not only that, lending requirements have tightened enough that you may not be able to get a loan at all. So how can you build up your credit history to improve your credit score if no one will give you a loan?

One of the best ways to rebuild your credit is to use a secured loan or a secured credit card.  Since the loan is backed by an asset, the lender is willing to take the risk of loaning you the money.  If you make sure the lender reports to the credit agencies (Equifax, Experian, or TransUnion) and that you send in all your payments on time this approach should help improve your credit.

How to Check Your Credit Score
If you’re not sure where your credit score stands, there are several ways that you can check your credit score.  In fact, you can get a free credit score from multiple sources online.

The FTC established a site called Annual Credit Report where you can get a free credit report several times a year.  Unfortunately it doesn’t include your credit score but there are places you can check it without paying.  Some of the sites, like Credit Karma, are free because they use a variation of the FICO score.  It may not match your FICO score exactly but can give you a rough idea of where you fall.

Of course, we’ve seen that the difference between credit tiers can add up to hundreds of dollars a year in interest expenses.  If you want to know exactly what your FICO score is then you can sign up for a free trial of several different services.  As with all free trials, if you don’t cancel after the trial is over you’ll pay a fee.

  • myFICO
  • Experian
  • TransUnion
  • Equifax
  • TransUnion

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