The Real Deal
Learn how to improve your credit rating score
By Jason Tyler
When lenders evaluate your loan application, they use a process called underwriting to evaluate your ability and willingness to repay your loan. They judge your ability to repay by looking at the amount of your income and how stable past earnings have been. This helps them to determine if you can afford the loan payments. They judge your willingness to repay by looking at your past credit history. Generally speaking, someone who has made payments on time in the past will probably do so in the future.
Lenders want their evaluation to be as accurate, objective and consistent as possible. In an effort to achieve these goals, most lenders use credit scores to help in the underwriting process. Credit scores are numerical values that rank individuals according to their credit history at a given point in time. Your score is based on your past payment history, the amount of credit you have outstanding, the amount of credit you have available and other factors.
Credit scores are one factor in determining if you qualify for a loan, but they may also be a factor in determining the price of your loan. Applicants with lower credit scores may pay higher prices for their loans because of the higher risk of default and loss.
There are many ways to build your credit score. However, most of these ways take time and effort but the rewards are definitely worth it. A high score will make it easier for you to secure a mortgage. It will also help you to receive the best possible rate, which can save you thousands of dollars over the life of the loan. To help you get started here are some basic ways to build a high credit score:
* Timely Payments. Making your payments on time is the best way to increase your score.
* Number of Trade Lines. The number of credit cards, auto loans and other types of credit you have available will affect your score. If you have a lot of trade lines, this may decrease your score because of the risk that you might not be able to pay off all of your accounts. On the other hand, lenders do like to see that you have credit available and can handle your credit wisely. Two to five current trade lines are ideal.
* Wise Credit Usage. The amount outstanding on each of your credit cards will also affect your score. In general, the lower the amount outstanding, the more likely it is that your score will be higher.
* Do Not Apply For Credit You Do Not Need. Whenever you apply for credit, the creditor will obtain a credit report from one or more of the three credit bureaus. Each such credit inquiry will stay on your record and will affect your credit score.
Jason Tyler is with Pacific Guarantee Mortgage. Information in this column is by the members of the Silicon Valley Association of Realtors. Send questions to: Ask Your Realtor, c/o SILVAR, Los Altos District, 345 San Antonio Road, Los Altos, CA, 94022; call 650.949.9115; or send email to ppompei@siliconvalley-realtors.org.
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