Credit Score

Your Credit Score

Lenders use credit scores for one main purpose: As a way to gauge the probability a buyer will default on payments. The lender wants to pick buyers whose credit is good enough that for every roll of the dice, default is unlikely to come up. The higher the probability, the higher the interest rate. The challenge for buyers is understanding what data lenders are using since credit scores come from different sources. There is not one credit score. There are many. Here is a primer.

Your credit score is a measure of your credit worthiness and helps lenders determine how likely you are to default on your loan. There is more than one way to calculate your credit score and many different companies that perform this task. FICO is one of the most well-known companies, but did you know there are 29 versions of the FICO score? Free credit score models like Credit Karma use other models including the vantage score by Vantage Score Solutions.

Mortgage companies typically rely on the FICO 2, 4 and 5 models, none of which are provided by free credit score companies. That said, Experian currently offers the FICO 8 model for free. While it is not identical to those used by lenders, it will provide the best free approximation. According to FICO, the score is broken up into five factors:

Improving Your Credit Score

○ Make all your payments on time. This seems obvious, but any missed payments will set you back.

○ Analyze your credit usage. Get your credit report and look at each credit card. What percent of your credit limit are you using? The lower the utilization the better, so focus extra payments on the credit cards that have the highest utilization.

○ Don’t open or close credit card accounts. This will shorten your average account history length and could negatively impact your score.

○ Check your report for errors. Credit bureaus are required to report accurate information and you are legally allowed to demand they investigate errors on your behalf.

Get Help

There are numerous companies that can save you the frustration and confusion that comes with analyzing your credit report and working to improve your credit score. Depending on your individual situation, some consumers can see a positive change in as little as 30-60 days. But consumers need to know what they are getting into. Different companies have different terms and different prices. Below are three companies we recommend.

Credit Saint

○ Pros: Good reviews; 90 day money back guarantee.

○ Cons: More focused on disputing inaccurate information on your report and less focused on helping you budget to improve your score over time.

○ Cost: Cheaper than other services at $60-$90 per month.

Lexington Law

○ Pros: Can offer fast credit improvement; Open since 1991.

○ Cons: Mixed reviews. More focused on disputing inaccurate information on your report and less focused on helping you budget to improve your score over time.

○ Cost: Options range from $90 to 129 per month

Cambridge Credit Counseling

○ Pros: Great Reviews; Nonprofit.

○ Cons- More focused on debt management solutions that may involve debt negotiation or settlement. Debt negotiation or settlement can lower your credit score, but if you are having trouble making your current monthly payments, this may be your best option.

○ Cost: Cheaper at $50 a month

Becoming financially healthier will not only ease your stress, but put you one step closer to home ownership.