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Keeping score of the game – the FICO score
With the average 30-year fixed rate mortgage hovering around a 3.65 percent interest rate right now for investors with the highest FICO (Fair Isaac Corp.) scores, it’s a good time to review how to tune up your credit score to help qualify for the best rates.
As a reminder, FICO scores were created to measure an individual’s financial fitness. The score ranges between 300 and 850, and is used by the vast majority of lenders in the U.S. While there are other scores used by banks, FICO is the lending industry standard for assessing overall credit risk. The main use of this scoring tool is to simply show the risk of possible default by any individual borrower.
Who qualifies for the best mortgage rates
Before the financial meltdown of the last several years, FICO scores of 720 and above were considered uniformly as the scores that would qualify borrowers for a bank’s best mortgage rate. But more recently, that number has been pushed upwards, and now 750 and above tends to be the new standard for qualifying excellence. About a third of U.S. consumers fall into this top-ranked category, while the median FICO score was 711 last year.
So naturally, as part of your overall investment property finance plan, you’ll want to check your credit score to see where you’re positioned before applying for any new mortgage. You can find yours through sites like freecreditscore.com or freescore.com. If you’re already at 750 or above, trying to improve your score will be a pretty fruitless endeavor, since lenders don’t really create a pecking order of default riskiness once you’re in the top echelon, and you’re showing the least borrowing risk. However, the goal for most will be to try to take some easy steps to help improve your overall FICO number.
Try these simple, easy credit score tune-ups:
Pay your credit card bill early
That is, pay your bill several days before your statement closing date each month. (This is not the statement due date!) Paying early will ensure you show a zero balance going into your next statement period.
Try to get any late payments removed
First, make sure there are no errors, and second, if you did unfortunately make a late payment, simply ask to have it removed as a “one-time-only” courtesy. If your credit card company says no, well, at least you tried…
See if your credit card company will increase your credit line
Remember, you’re seeking an increase to ultimately boost your FICO score – not to actually use the increased credit line! This is accomplished by helping your “utilization” ratio, which weighs the amount of actual debt you have outstanding with the total amount of credit you can actually use on any given card.
Apply for new credit cards sparingly
Each time you apply for new credit, your FICO score will drop a little bit. So avoid applying for a credit card for every store you walk into that’s offering a “10% off” promotion if you sign up for one of their store cards on the spot.
Don’t close old, unused accounts
Even if you haven’t used a credit card in some time, do not close the account. By remaining open, the available credit line helps to effectively lower your utilization ratio (mentioned above), and your FICO score won’t be adjusted downward.
Set up automatic bill payments
Good, on-time payments can help bump up your FICO score, by as much as 50 points if done regularly on all your cards for at least six months. If you don’t like the concept of automatic deductions, you can arrange for your credit card company to send you timely email alerts as payment reminders.
Pay down some debt
If you receive a windfall, tax refund, bonus or the like, consider making a sizeable dent in your debt load. Any outstanding debt over 35% of your existing credit line on any one credit card will drag your score down. However, paying the debt down to get the ratio under 35% will yield a nice boost to your FICO score.
The key to your bottom line
Try utilizing some or all of these credit score tune-up tips, and get your FICO score up over that 750 mark. That way, when you next apply for investment property financing, your score will help qualify you for the bank’s best mortgage rates, ultimately either saving you money on a monthly basis, or allowing you to purchase more house for the money.
photos courtesy of anchoragehomesearch.com, lgfcunewsworks.org, infinitecredit.com, southwaterfront.com, credit-qna.com, money.cnn.com