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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
What's it take to raise my credit
score?
Dear Dr. Don,
I recently paid off $35,000 in credit card debt.
I currently have $5,000 in debt and no car payment. My salary is $87,000
per year and I have been in the same job for 12 years. Due to my high
credit card debts in the past, I have a credit score of 620.
Two questions:
- Now that I have paid off my debt, will my score improve? If
so, how long will it take?
- What are my chances of getting a home loan for $220,000 with
an interest rate of 7.5 percent or better?
Thank you for your help,
Rick Redemption
Dear Rick,
High debt levels can play a factor in your credit score, but it's
likely that there was more than that going on, such as late payments,
to have a credit score of 620. A credit score reflects the information
in your credit report using a scoring model to predict the likelihood
that you will repay debt.
Since the lenders decide where to report your payment
history, your credit report and credit score may be different at
each of the three main consumer-reporting agencies. You know one
of your credit scores, but maybe not all three. Bankrate has partnered
with FICO to provide a free estimate of your credit
score's expected range.
The consumer-reporting agencies all offer credit score
simulators that estimate how your actions can change your credit
score. Paying down your credit card debt should improve your score
within a month or two as your reduced balances are reflected on
your credit report. Late payments will stay on your credit report
for seven years before dropping off the report.
Your ability to get a home loan for $220,000 with a fixed interest
rate of 7.5 percent or better is pretty good right now. MyFico.com
provides guidance on how credit scores influence the interest rate
you can expect to be offered on a 30-year fixed rate mortgage loan.
| FICO Score |
Interest rate |
|
720 - 850
|
5.586% |
|
700 - 719
|
5.711% |
|
675 - 699
|
6.248% |
|
620 - 674
|
7.398% |
|
560 - 619
|
8.531%
|
|
500 - 559
|
9.289%
|
Source: MyFico.com 1/15/2004
Beyond the credit report and credit score, lenders
use front-end
and back-end
ratios that measure income/expense ratios and the loan-to-value
ratio as part of their loan underwriting standards in determining
what they're willing to lend you on a home purchase.
You can use Bankrate's "How much house can you
afford" calculator
to see if you would qualify for a $220,000 first mortgage.
-- Posted: Jan. 16, 2004
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