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Ask Dr. Don

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.

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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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See Also
The power of credit scores
Requesting a credit report
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