Understanding your credit scores

**Please note that this was originally presented several years back and the information may or may not be up to date.  We highly advise contacting a lender or mortgage broker to get the latest info.

It is possible for anyone to raise his or her credit! But to do that, you should know how credit reports and credit scores work. Many people are in the dark about what can and what cannot affect their credit. Some consumer groups have demanded more access to this information and in response FICO is upgrading its  myfico.com service to include an online calculator that will let consumers see how seven key variables could influence their FICO score.

Other experts in the industry are giving people some “back to basics” advice as to what are the best steps to improve a credit score. The National Association of Mortgage Brokers Credit Scoring Committee advises borrowers to take the following steps:

Paperwork and taxes

✔ Contact a mortgage professional 90 days in advance of purchasing a home, in order to run a credit report for examination and correction, if necessary.
✔ Close your account only after a professional reviews your credit profile and advises you to close specific accounts.
Arbitrarily closing accounts can artificially skew your credit utilization profile.
✔ Avoid opening new credit sources and transferring current balances. Also avoid “credit surfing” for the lowest rate. These
actions can distort your credit and make you seem “flighty” to potential lenders. The wise course is to stick with the credit
cards you’ve had for the longest time.
✔ Restrict balances on your credit cards to no more than 30% of the maximum available limit. Spread out the balance over
two or three cards rather than consolidating on one card.
✔ Pay all you bills, no matter how small, on time. Even unpaid gas cards, if sent to collection, can show up on your report and
lower your score.

A credit score is a numerical representation of a person’s likelihood of repayment on a loan based on that person’s credit history and credit habits. To understand why a credit report scores the way it does look a the four reason codes given with each score. Reason codes are listed in order of importance or significance. The higher the percentage the more weight is assigned to the score.

35% Late Payments, Collections, Bankruptcies, Past Dues
30% Outstanding Debt-Balances on Accounts
15% Length of Credit History
10% Types of Credit
10% Inquiries (applications for New Credit)

If you haven’t recently checked your credit report, contact each of the three credit  companies and request a copy. Most banks and lending institutions now offer this to their customers as well.

Once you receive it, read everything carefully. If you happen to see an error – which can include an outstanding balance on an account you have paid on time – report it immediately to both the credit bureau and the merchant who made the mistake. Only merchants can make corrections, If you continue to find misinformation on your credit report after and investigation, you have the right to attach a letter of explanation that will be sent to anyone requesting the report. This can be done online or by mail.


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