If you’re a parent or educator, you probably know about grade inflation. It’s the recent trend in more students getting higher grades. But there’s a new kind of inflation in town: credit score inflation. For example,15 million more consumers have been moon-launched with FICO credit scores above 740 today than there were in 2006, and about 15 million fewer consumers with scores below 660, according to Moody’s.
Caroline Mayer, consumer blogger, says, “It’s an algorithm designed to predict your likelihood of repaying debt. Lenders use your score to determine whether to approve you for loans and credit cards and at what interest rates. Insurers use credit scores to set premium rates, and employers use them when making hiring decisions.
FICO credit scores run from 300, considered the highest risk of default, to 850, the lowest risk. Though FHA for years has accepted applicants who have FICO scores in the 500s, the practical reality has been that most lenders ignore borrowers whose scores are under 620 or even 640.
Your score is based on many different pieces of credit data in your credit report. This jigsaw of data is grouped into five categories as outlined below. The percentages in the chart (above) reflect how important each of the categories is in determining how your FICO Scores are calculated.
If you don’t know your FICO credit score, you can request a free copy of your credit report then check it for errors, such as late payments incorrectly listed for any of your accounts and the money owed for each of your open accounts are correct. If you find errors on any of your reports, dispute them with the credit bureau.
Forbes says to be careful with some consumer sites offering free credit reports. “The new free scores from consumer sites are often “ballparks,” not the ones used by financial institutions to determine credit. Even more confusing, your FICO credit score or Vantage score may differ from lender to lender, since each institution can tinker with the parameters.
Why should inflated FICO scores matter to you the homebuyer? It is possible you could be approved for a home loan thant is bigger than tyou can safely handle.
Kenneth Harney at The Real Deal writes, “If you’ve got a low FICO credit score but believe you can handle monthly mortgage payments instead of rent, here’s some potentially good news: The government is now willing to give you a better shot at obtaining a low-down-payment home loan from the Federal Housing Administration. Under a key policy change that took recently, lenders nationwide now have more leeway to approve mortgages to borrowers who qualify under FHA’s underwriting guidelines but may have below-par FICO credit scores.”
Making your credit payments late is the kiss of misfortune for your FICO credit scores. Set up reminders for making payments or switch from paying by check to automatic bank debits to each creditor.
Reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards. Then come up with a payment plan that pays off the cards. Once credit card debt is gone, build an emergency fund equal to six months living expenses. Finally, save large amounts of money going to interest by paying off your mortgage early.
The best advice to get a higher FICO score is to manage your credit responsibly over time. If you haven’t done that, then you need to repair your credit history before you see credit score improvement.
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