Credit scores are essential to every aspect of your life, especially when you are buying a home. How you manage your credit plays a significant role in how your credit score is calculated, and ultimately, in determining interest rates and terms on your loan.
According to estimates, American consumers ended 2019 with about $4.2 trillion in debt that’s unrelated to their housing debt. Credit card debt is particularly troublesome, with estimates that people have over $400 billion in credit card debt.
When it comes to buying your home, managing your credit starts long before you speak with your lender. There are new changes to the FICO scoring models that you should be aware of before you begin your home buying journey.
WHAT ARE THE NEW FICO® SCORE CHANGES?
Two new FICO scores have been announced that will be made available by the end of 2020: FICO 10 and FICO 10 T, collectively known as the FICO Score 10 Suite.
These changes could potentially change the score for those who have managed their credit wisely, and those who have missed payments or a large amount of debt. Despite the new scoring system treating past delinquencies more severely, the FICO Score 10 Suite will also consider historical information about your credit card balances and payment amounts.
The FICO 10 T will take a look at 2-years’ worth of trended data, showing how you manage your credit. FICO 10 doesn’t use this trended data, but FICO 10 T does. By evaluating previous credit history, it can show if people are paying off balances, carrying balances over, or consolidating debt. This explains how you use your credit more often and if there are periods where you don’t, such as around the holiday.
The primary goal of these changes is to give a more accurate credit score for borrowers to consider. The FICO 10 will use the current FICO model, which can help make integrating this new model easier for lenders.
HOW THESE CHANGES IMPACT YOU
The good news is that even if your score is negatively impacted by the FICO 10 scoring model, you may not be denied an affordable mortgage. One of the great things about these changes is that when you want to buy a home, you will better understand what you can afford. Every payment that you make will matter even more than before under these new FICO scores, which is why you must make sure that you stay current in all your payments.
One area where you may notice an impact, thanks to the new FICO scores, is if you apply to refinance your mortgage. If the new scoring model causes your score to raise, you may be eligible to refinance at a lower interest rate. Other factors help determine the terms of your loan, so it’s best to speak with your lender to determine if the time is right to refinance.
In many cases, homebuyers looking for mortgages may not be impacted by this rule. For the most part, lenders that generally back standard mortgages will still be looking at the current FICO models when they are considering loan applications.
CHECKING YOUR CREDIT SCORE
Monitoring your credit history can be an essential step in improving your credit. You are eligible to get a free credit report once a year, but there are plenty of other sites and services that help you check your credit score. Many credit card companies offer a free, regularly updated credit score every month for their customers.
Regularly tracking your credit score is a great way for you to stay on top of your credit and potentially improve your credit score. You are able to verify if any of the changes you have made have had an impact. You should also check it to make sure the information on the report is correct. This is one way that you can identify any potential identity theft. If you suspect that you’re a victim, you should continually check your credit to make sure that there are no issues that you need to remedy.
It’s also a good idea to know your credit score before you apply for a significant loan, such as for a home or car. This can help you better understand what interest rates you may qualify for with your mortgage, or if you will be denied based on your credit.
WHAT YOU CAN DO ABOUT YOUR CREDIT
The first step that you can take is to check your credit report, as we mentioned above. Doing so will help you identify any issues that you may have and identify what is having the most significant impact on your credit score. Knowing which risk factors are impacting your score will give you the first place to start on your journey of repairing your credit.
After identifying any negative risk factors, it would be best to pay your bills on time. Lenders are particularly interested in how reliable you are when it comes to maintaining your payments. If you commonly pay your bills on time, then this is a good indication that you are going to pay your bills on time in the future. If you are behind, do your best to get caught up.
Paying off debt can also boost your credit score and improve your debt-to-income ratio. This credit utilization ratio is an essential factor in your credit score calculation, so paying off debt and avoiding using your credit cards as much as possible can be great for you.
Understanding your credit and how your credit score is calculated is an important step in the home buying journey. With the new FICO Score 10 Suite, your score may potentially change and may position you to get the home you’ve been waiting on.
If you have questions about your credit score or general questions about the home buying process, reach out to one of our certified mortgage experts today.