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Building a Good Credit Score: Tips for California Home Buyers

Are you planning to use a mortgage loan when buying a home in California? If so, you should know a few things about your credit score.

For starters, you should understand how your credit score can affect you when buying a home in California. It’s also helpful to know how to improve your score, especially if it falls short of the minimum requirement for a mortgage loan.

The good news is, you’re in the right place. Below, we’ve offered some time-tested strategies that can help California home buyers improve their credit scores.

What Are Credit Scores, Exactly?

Credit scores are three-digit numbers derived from information found within a person’s credit report. The report itself contains a variety of information relating to your financial past. This information is put through a computerized scoring system to produce a three-digit score.

There are several different scoring models in use today. The most common one used within the mortgage industry is the FICO score. The FICO scoring scale ranges from 300 to 850. A higher score is better. People who claim to have “excellent credit” usually have scores in the 750 range or higher.

How They Affect California Home Buyers

When it comes to buying a home in California, having a good credit score can benefit you in several ways.

First, it could help you get approved for a mortgage loan. Having a good score could also help you get a lower interest rate, and this could save you a lot of money over time.

Related: Minimum score needed for a mortgage

Banks, lenders and creditors use these scores for risk-analysis purposes. A borrower with a low score is considered a higher risk, as far as lenders are concerned. Such borrowers have a harder time getting approved for loans, and they often get charged higher interest rates when they do get approved.

On the other hand, a borrower with a high score is considered a lower risk for the lender. These borrowers have an easier time qualifying for financing, and they also qualify for lower interest rates.

Those are the two main benefits to having good credit, when it comes to buying a home in California. It could help you qualify for mortgage financing and secure a good interest rate.

The Top 5 Scoring Factors

If you want to know how to get a good credit score, you must start by examining the individual factors that make up your score. There are five of them, and they are all listed below.

The percentage beside each factor shows how much it “weighs” in the overall scoring formula. These percentages are based on the FICO scoring model, in particular.

  1. Payment history (35%) — This weighs more than any other single factor, when it comes to credit scoring. Your payment history is a record of how you have repaid your debts in the past. It includes your payment history for credit cards, installment loans, retail accounts, mortgage loans and the like.
  2. Amounts owed (30%) — Owing money on a credit account doesn’t automatically make you a high-risk borrower. But if you are using a high percentage of your available credit limits, it could result in a lower score. For instance, if you have two retail charge cards, and they are both nearly maxed out, you are using a very high percentage of your limits. This high “utilization ratio” could lower your score.
  3. Length of credit history (15%) — There’s not much you can do about this item. But it is one of the five key factors that influence your credit score, so it deserves to be mentioned. Generally speaking, a longer history will increase your FICO score. But this factor does not weigh as much as the two previous items (payment history and amounts owed).
  4. Types of credit used (10%) — Scoring models also consider the different types of credit that you use. They look at credit cards, mortgage loans, installment loans and retail accounts. This is also known as the “credit mix.” As with item #3, this one does not weigh as heavily on your score. So you should probably focus your attention on those 30% and 35% factors listed above.
  5. New credit (10%) — This is the last of the five factors that influence your score. Here’s what you need to know about it: Opening multiple credit accounts in a short period of time could potentially lower your score.

How Can You Improve Your Score?

So, how do you get a good credit score before buying a home in California?

For starters, you should focus on your payment history and the amounts owed on your various accounts. These two factors alone account for 65% of your overall score. So they deserve the most attention.

You are not powerless when it comes to your credit score. There are plenty of things you can do to maintain a good rating, and doing so could make it easier to buy a home in California.

Here are three specific steps you can take:

  1. Pay all of your bills on time. This is the most important thing you can do to achieve a good credit score, because it weighs the most in the scoring model.
  2. Use credit sparingly. An ideal scenario is to have a relatively low balance, compared to the available limit. The worst thing you can do is max out your cards.
  3. Get copies of your credit reports from all three of the reporting agencies (Experian, TransUnion, and Equifax). Review them for accuracy. Dispute any errors to have them corrected. Mistakes on your credit reports could have a negative impact on your score.

We can’t stress the importance of maintaining a good payment history. Industry data have shown that a single late payment on a credit card, car loan, or mortgage could lower your score by 50 points or more. The other factors matter to some degree, but not as much as the payment history.

Where to Get Help

If you currently have bad credit, you might want to seek help from a non-profit counseling agency. These organizations specialize in helping consumers with credit-related issues. They can help you develop a plan to boost your score, pay down your debts, and other strategies that could help you when buying a home in California.

Here is some advice from the FTC on choosing a credit counselor. According to the FTC: “Most reputable credit counselors are non-profit and offer services at local offices, online, or on the phone. If possible, find an organization that offers in-person counseling.”

Disclaimers: Most of the advice presented above was adapted from the website. That’s the company that developed the FICO scoring model. Their information is deemed reliable but not guaranteed.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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