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Improve your FICO


In today's increasingly automated society, it should come as no surprise that when you apply for a mortgage, your ability to pay can be reduced to a single number. All the years you've been paying your mortgage, car payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The best known is called the FICO score, based on a model developed by Fair Isaac and Company (hence the name) and used by Experian. Equifax's model is called BEACON, while TransUnion uses EMPIRICA. While each of the models considers a range of data available in your credit report, the primary factors are:

PAYMENT HISTORY (35%) - Are your bills paid as agreed- The most recent six month period is crucial- The highest weight is given to the liability with the highest payment

BALANCES CARRIED (30%) - Keep your balances as low as possible- Spread out your credit card balances over several cards- Try to keep balances below 50% of the limit on each card

CREDIT HISTORY (15%) - Longer Credit History typically reflects a higher credit score- A long credit history of always paying as agreed will result in a higher score- Try not to close old credit accounts, especially if you have a long history with that particular creditor.

MIX OF ACCOUNTS (10%) - It's ideal to have BOTH installment and revolving accounts- Having a mortgage loan history is typically positive (if paid as agreed)- 3 to 5 open credit cards is fine to have (more is OK as well)

INQUIRIES (10%) - Only the first 10 inquiries count each year- After 10 inquiries, it will not impact your credit score- Shopping around? Multiple inquiries from mortgage companies and auto loan companies count as only one inquiry if they are done within a 30 day period- Certain credit inquiries do not hurt your score (i.e. Job related, insurance/utilities, promotional pre-approved offerers you receive in the mail)

Easy steps you can taketo increase your scores

Keep your credit card balances under 50% of the limit on the card. Many people believe that a low limit will translate into improved credit, but not generally so. It is better to have a $5000 balance on a card with a $10,000 limit, than a $3900 balance on a card with a $4000 limit. Therefore, increasing limits on your cards without increasing your balance will actually improve your credit score. Every six months or so, contact your creditor and request that they increase the limit on your card. If they state that they have to run a credit report on you to do this, do not continue.

Evenly distribute your credit card debt over several cards in order to change the ratio of how much you owe on the card in relation to the limit on the card. If you have debt on only one card, and four additional cards with zero balances, you should take steps to evenly distribute the debt on the first card over all five open credit cards. As a whole, try to keep the amount you owe on all your credit cards well under 50% of the limits on all the cards collectively. Lowering this debt owed-to limits ratio is very important.

Think twice about closing out credit card accounts. Many will think that closing out accounts will have a positive impact on their credit score…this is not true! Even older accounts will figure positively toward your history, and the extra available, but unused credit won’t hurt your score either. If you can, use old accounts periodically (every 3 to 6 months) - charge a small amount, and then pay it off immediately. Closing accounts that have a long (positive) history can hurt your scores.

Be cautious of certain types of inquiries to your credit. Most consumers are aware that extra checks into your credit history may cause your score to drop. This is due to the appearance of a consumer looking to take on extra debt. But did you know that even multiple inquiries for a mortgage will not hurt your score any more than just one inquiry, so long as they are within the same 30 day period?

Pay any accounts that are past-due. If you are aware of an account that is currently past due, take immediate action to bring the account current. Past due accounts can severely hurt your scores.

Have late payments removed. If you are aware of erroneous late payments on your report, then you should contact the company and complain and fight to have them removed. Be persistent - work your way up the ladder. Additionally, even if the late payment is correct, you should try to get it removed. If you are a long-standing customer, very often they will remove the late payment from your report as a "good faith adjustment". Persistence and politeness pays off in this scenario.

Make sure your creditors are reporting the limits on your cards to the credit bureaus. No limit being reported gets scored as though the current balance has "maxed out" the account. If your creditor is not reporting the limit on your card, contact them and ask that they do so immediately.

It's your job to monitor your credit. You are entitled to free copies of your credit report from each credit bureau (Equifax, Transunion, Experian) at the following website: www.annualcreditreport.com You can run one free report on yourself from each bureau once per year. Rather than run all three at once, I would recommend that you stagger the reports you run. For example, in December, run a report through Equifax. In April, run a report through Transunion. And in August, run a report through Experian. This will give you a good opportunity to monitor your credit over the course of a year as opposed to just one time each year.

Credit scores do not change overnight. Improving them requires time and diligent effort on your part, so it's a good idea to get the ball rolling on improving them as soon as possible, and to always monitor your credit over time.

If you have any questions on the above material, please feel free to contact me at anytime.

Larry Gavett, Senior Loan Officer NMLS #133735
Union Home Mortgage Corp.
900 Washington Ave, Carnegie, PA  15106
Direct:  (412) 831-3330
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