Section 1.1

Know Your Credit Score

Your FICO credit score is one of the fundamental parts of getting a home loan, regardless of the type of loan you want.

Because it's such an important part of getting a home loan, it's important for you to understand all the basics about what it is, how it works, and why it matters.

What is a Fico Score?

To summarize the above, an IRRRL cannot take place unless the borrower is noticeably benefitted by the refinance.

What Do the Credit Score Numbers Mean?

For the Credit Bureaus

Each of the three main credit bureaus—Equifax, Experian, and TransUnion—use similar factors to calculate this number. However, the exact algorithm for each bureau is slightly different, and they haven't made all of the factors public.

In general, though, your FICO score can range anywhere from 300 to 850, with a higher score always being better. These scores often get grouped into ranges that relate to the "quality" of your score:

  • Bad Credit = ?579
  • Poor Credit = 580–669
  • Fair Credit = 670–739
  • Good Credit = 740–799
  • Excellent Credit = ?800

For Low VA Rates

However, if you want to get a VA home loan, most lenders, like Low VA Rates, tend to be more generous with these groupings, since VA loans have less strict credit requirements. For our VA home loan borrowers, we define bad, poor, fair, good, and excellent credit as follows:

  • Bad Credit = ?579
  • Poor Credit = 580–599
  • Fair Credit = 600-619
  • Good Credit = 620-679
  • Excellent Credit = 680 plus

In order to stay on top of your credit score, you can (and should) get one free report each year from all of the credit bureaus. There are a variety of websites that offer this service, so all you need to do is simply Google "free credit report" and choose the one you feel most comfortable using.

How Do Credit Scores Work & How Are They Calculated? 

Though each credit bureau does have slight differences in how they calculate your FICO score, all three of them do use the following 5 factors:

Payment History

This area of the credit algorithm has the biggest impact on your score because it looks at whether or not you've made on-time credit payments in the past. Essentially, if you've been responsible in paying back your credit before, then it's more likely you'll continue to make on-time payments in the future.

Amount Owed

This segment of your FICO score focuses on how much of your available credit you use each month. You want to keep this credit utilization ratio below 30% for each line of credit in order to show that you're a responsible borrower who doesn't take on more debt each month than you can reasonably handle.

Length of Credit History

This portion of your score considers how long you've had each of your lines of credit. The longer they've been open, the more history there is for the algorithm to evaluate, which gives the credit bureaus a more accurate picture of the type of borrower you are. To put it simply, the older and more mature your credit is, the better.

Credit Diversity

This section reflects the different types of credit you have, including revolving credit like credit cards to longer-term loans like the one for your car. It also considers the varying level of risk for each of your debts. Having a good credit mix of both long- and short-term loans, as well as high- and low-risk debts, gives you a more well-rounded profile.

New Credit

This part of your credit score covers your most recent lines of credit, as well as any new credit inquiries. You will want to be cautious when you apply for new credit, because having too many new lines of credit, too close together, can make you seem desperate for credit, which can negatively impact your score.

Why Does Good Credit Matter?

  • 1Having a good credit score can open a lot of doors for you. For starters, you can only qualify for some types of credit if your score is high enough. While the VA doesn't have a minimum credit score requirement for VA home loans, for example, other loan programs do. If you're a non-veteran borrower and you want to get an FHA or conventional home loan, your credit score could prevent you from getting approved if it's not high enough.
  • 2Your score can also affect whether or not you get approved for the credit card you want, as well as any personal or auto loans you might want to take out. But getting approved is just the first step.
  • 3Your credit score will also affect the interest rate you can get on every line of credit. If you want the lowest possible interest rate being offered by a lender, you're going to need one of the best credit scores.

How to Improve Your Credit Score

Because what your credit score is does matter, we want to talk about some of the ways you can start building and improving it.

While there are a lot of things you can do, we want to focus on just a couple tips for each of the areas with the biggest impact: your payment history and your credit utilization ratio.

Improve Your Credit Score

When it comes to your payment history, the 2 biggest things you can do to improve your score are:

  • Review your Credit Report
    As we mentioned before, you should do this every year. You should review it for any errors such as lines of credit that aren't yours, a balance that you've actually paid off, or even a missing line of credit. If you find any errors, you will need to open a dispute with each of the credit bureaus.

  • Make Your Payments On Time
    Not all of the negative things on your credit report will be errors. Some might be actual mistakes you made, like a late payment or an account that went into collections. Only time can fix these, and eventually they will fall off your credit report. However, you can always start establishing a good history now because the sooner you do so, the longer you'll have it.

Improve Your Credit Utilization Ratio

For your credit utilization ratio, the 2 most impactful improves you can make include:

  • Pay Down Credit Card Debt
    You want all of your credit cards to be below the 30% utilization ratio in order to improve your credit score. So, for example, if you have a credit card with a $1000 limit, you want to keep your monthly balance on that card below $300. If your second credit card has a $500 limit, you'll want to keep that balance below $150.

  • Leave Old Credit Accounts Open
    When you close old credit cards, your total available credit amount goes down, which skews your overall utilization ratio. (Not to mention it will also negatively impact the length of history portion of your credit score.) In order to make sure old lines stay open, you may want to make a small purchase on each card once a year or so in order to make sure it stays active and open.

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Need Help with Your Credit Score?

At Low VA Rates, we offer a no-obligation consultation, which can include taking a look at your credit score and putting together a plan to help you improve it. Even if you don't plan on buying  a house in the near future, we're happy to help you on the journey to get there.

Simply give us a call! We're happy to answer your questions about FICO scores and how they work, as well as give practical advice regarding your score.

A few additional videos about credit scores: