There will come a number of occasions in your life when your credit score will become very important.
One of the most important being the time you're about to buy a home. Lenders take that 3-digit number pretty seriously and as a result, it can lower or raise your interest payments by thousands and thousands of dollars over the life of a mortgage.
It was, therefore, no surprise when a reader wrote in to find out how she can go about getting her credit score to a certain number for a home purchase she wanted to make. Simply by monitoring her credit score prior to formally applying for a home loan, can shift her into a good position to get the best interest rate available.
This is, of course, a favoured and recommended way of going about making a mortgage application. Now you can avoid negative surprises at the time of application and afford yourself the time you need to correct any errors.
There are tools to help you improve your credit score and we’ll show you how. But before we dive into that part of the article, let’s first get a well-rounded idea of all that credit scores entail.
Credit reporting agencies in Australia
The first bit to grasp is that you don’t have one credit score, you, in fact, have three! The truth is you might actually have as many as fifty, but the three most common – and the ones that are used by mortgage lenders – are issued by the three major credit bureaus, namely, Equifax, Experian and TransUnion.
During the mortgage application process, they pull the three scores from each of the reporting agencies earlier mentioned. The reason for this is simple, there generally differences in scores from one agency to the next. The differences are purely due to the credit bureaus each having slightly different financial information on a consumer. Mortgage lenders work with the middle score.
A quick look at what the middle score would be if the three scores were 770, 780, and 790 respectively, the lender will consider 780 as your credit score for the purpose of the loan application.
Differences as little as just 20 points can significantly change your interest rate to be much higher or lower. In fact, a 20- point difference could send you downwards from the 720+ tier down to the 700 – 719 tier, rendering your loan agreement with a 1/8 increase in the rate. Calculate that over 30 years and see how much extra you end up paying! It’s a very serious matter.
This is exactly why it’s paramount that you monitor your credit scores before you decide to take the step in applying for a mortgage. So, let’s get to the part where we track all three credit scores. There are a number of ways to do this, and some might cost you, where others are free.
MyFICO credit score
The best of the three, thanks to its reliability and user-friendliness, albeit the most expensive, is myFICO. This system is run by Fair Isaac Corporation, the creator of the FICO score. You can easily subscribe to the service and from there, monitor your credit reports from all three bureaus, as well as your three FICO credit scores. It’s amazing - one place for all three scores!
It does, however, cost $19.95 per month, and that’s the catch. Even if you’re just interested in seeing a snapshot of your scores, you’ll still be required to pay.
It must still be said though, that if you’re planning on buying a home, myFICO is an excellent way to monitor your scores and deal with any issues prior to submitting a loan application.
Credit card companies
Numerous credit card companies will offer you free access to your FICO score. However, not all will provide you with your official FICO score, or scores from all three credit bureaus. So, it’s still not the most ideal choice when trying to determine your middle score rating.
In each category with some of your credit card suppliers, you’ll be scored based on A, B, C and D grades. Something you could easily determine online is to look at what is keeping your payments paid in full and on time over the next 12 months will do to your score. Or simply measure the impact of a late or short payment.
When you do this, you’ll find that just one 30-day late payment can drop your score from 780 to 739. A 60-day late payment drops it to 727, and a 90 day late will drop it to just 718.
Credit Sesame credit score
This is another free option. Credit Sesame reports a score at 818. Then the app goes on to show broader financial information, such as your home value and a few figures in terms of debt-to-income ratios. This is all determined from your income.
You would need to provide your name, physical address and have a valid identification as well as answer a few questions. This is simply to ensure that you are who you say you are. Consumer validation is important!
So if you're ready to sign up to one of the above credit reporting agencies and keep track of your credit scores, now is a great time to do it!