Rising unemployment, bad debts, and actions taken by credit card issuers have now put more than ¼ of American consumers into a credit score category that makes it nearly impossible to get a loan. A new report shows that 25.5% of Americans now have a FICO score under 600.
You may have read that new guidelines from Washington say that consumers with scores as low as 580 can get FHA loans with only 3 ½% down – and that those with scores between 500 and 580 can get in with 10% down.
Well, yes, banks are allowed to make those loans. But they aren’t likely to do it. In real life, a FICO score under 600 almost guarantees that you’ll be turned down. And even with a score of 600 to 700, being approved is iffy.
At 700 to 750 you’ll probably be approved, but not with the very best rates. If you want to be assured of getting a loan with the most favorable interest rate, your score needs to be 750 or above. But don’t count on this to be true in the future. According to a FICO survey, 46% of bank risk managers believe that lending requirements are going to get tougher in the coming years. That could mean even higher scores will be necessary.
If you don’t know your own score, you really should check it.
Even consumers who are diligent about bill paying can have low scores due to identity theft or the fact that when the credit crisis hit, many credit card issuers lowered credit lines even for their best customers.
How can you learn your scores?
You can obtain your credit report by making a home loan application, but it isn’t wise to wait until you want a loan to check your scores. A few banks or credit unions will provide your scores for free as a customer service; you can get a free credit report with scores from this site; or you can purchase your scores directly from the three major credit bureaus. And yes, it is worth it to pay a small fee for the information, because knowing it and taking steps to improve it if necessary will save you thousands in interest on future loans.
If your scores are low, take these steps to raise them:
First, if your report contains errors or shows negative information that is more than 7 years old, follow the directions and get those items removed.
Lower your debt. Your “credit utilization ratio”- which compares your debt to your available credit – makes up 30% of your credit score, so this is critical. The combined balances on all your credit cards and lines of credit should be no more than 30% of the credit available to you. For the highest ratings, use no more than 10% of your available credit.
Keep all old credit card accounts open, but don’t apply for new ones. Remember, you want more credit available than you use, so even if you have to pay a small annual fee, keep those old accounts open.
At the same time, credit inquiries bring your scores down, so don’t apply for any new credit unless you actually need it. Ignore those department store offers no matter how tempting they are.
One thing to note: Multiple inquiries that are obviously for the same purchase count as one when made within a narrow time frame – so it won’t hurt to shop around for a loan.
Pay your bills on time. If you have past due accounts, get them paid, and then create a new track record of paying on time, every time. This counts for 35% of your FICO score.
One more thing to notice…
A few lenders are now using the VantageScore – which differs from the FICO score in both the scoring method and the points. VantageScores go as high as 990 – so a 750 score with this method is not favorable. When checking your score, be sure to find out if it’s FICO or Vantage.
Author: Mike Clover