The Art of Mortgage Pre-Approval

Buying a home can feel like a cut-throat process. You may find the craftsman style house of your dreams only to be bumped out of the running by a buyer paying in all cash, or moving super swiftly. But fear not, understanding the home buying process and getting a mortgage pre-approval can put you back in the race and help you secure the house you want.

What is Mortgage Pre-approval?

Mortgage pre-approval is essentially a letter from a lender that states that you qualify for a loan of a certain amount and at a certain interest rate based on an evaluation of your credit and financial history. You’ll need to shop for homes within the price range guaranteed by your pre-approved mortgage. You can find out how much house you can afford with our home affordability calculator.

Armed with a letter of pre-approval you can show sellers that you are a serious homebuyer with the means to purchase a home. In many ways it’s competitive to buying a home in cash. In the eyes of the seller, pre-approval can often push you ahead of other potential buyers who have not yet been approved for a mortgage.

Getting pre-qualified for a mortgage is not the same as pre-approval. It’s actually a relatively simple process in which a lender looks at a few financial details, such as income, assets, and debt, and gives you an estimate of how much of a mortgage they think you can afford.

Taking out a mortgage is a huge step and pre-qualification can help you hunt down reputable lenders and find a loan that potentially works for you. Going through this process can be useful, because it gives you an idea of your buying power, or how much house you can afford.

Check out local real estate
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your home-buying journey.

It also gives you an idea of what your monthly payment might be and is a chance to shop around to various lenders to see what types of terms and interest rates they offer. Pre-qualification is not a guarantee that you will actually qualify for a mortgage.

Getting pre-approval is a more complicated process. You’ll have to fill out an application with your lender and agree to a credit check in addition to providing information about your income and assets. There are a number of steps you can take to increase your chances of pre-approval or to increase the amount your lender will approve. Consider the following:

Building Your Credit

Think of this as step zero when you apply for any type of loan. Lenders want to see that you have a history of properly managing your debt before offering you credit themselves. You can build credit history by opening and using a credit card and paying your bills on time. Or consider having regular payments , such as your rent, tracked and added to your credit score.

Checking Your Credit

If you’ve already established a credit history, the first thing you’ll want to do before applying for a mortgage is check your credit report and your FICO score. Your credit report is a history of your credit compiled from sources such as banks, credit card companies, collection agencies, and the government.

This information is collected by the three main credit reporting bureaus, Transunion, Equifax and Experian. Your FICO score is one number that represents your credit risk should a lender offer you a loan.
You’ll want to make sure that the information on your credit report is correct.

If you find any mistakes, contact the credit reporting agencies immediately to let them know. You don’t want any incorrect information weighing down your credit score, putting your chances for pre-approval at risk.

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Stay on Top of Your Debt

Your ability to pay your bills on time has a big impact on your credit score. If you can, make sure you make regular payments. And if your budget allows, you can make payments in full. If you have any debts that are dragging on your credit score—for example, debts that are in collection—work on paying them off first, as this can give your score a more immediate boost.

Watch Your Debt-to-income Ratio

Your debt-to-income ratio is your monthly debts divided by your monthly income. If you have $1,000 a month in debt payments and make $5,000 a month, your debt-income ratio is $1,000 divided by $5,000, or 20%.

Lenders may assume that borrowers with a high debt-to-income ratio will have a harder time making their mortgage payments. Keep your debt-to-income ratio in check by avoiding making large purchases before seeking pre-approval for a mortgage. For example, you may want to hold off on buying a new car until you’ve been pre-approved.

Prove Consistent Income

Your lender will want to know that you’ve got enough money coming in each month to cover a potential mortgage payment. So, they’ll likely ask you to prove that you have consistent income for at least two years by taking a look at your income documents (W-2, 1099 etc.).

For some potential borrowers, such as freelancers, this may be a tricky process since you may have income from various sources. Keep all pay stubs, tax returns, and other proof of income and be prepared to show them to your lender.

What Happens if You’re Rejected?

Rejection hurts. But if you aren’t pre-approved, or you aren’t approved for a large enough mortgage to buy the house you want, you also aren’t powerless. First, ask the bank why they made the decision they did. This will give you an idea about what you might need to work on in order to secure the mortgage you want.

SoFi Mortgage.


The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Mortgages are not available in all states. Products and terms may vary from those advertised on this site. See SoFi.com/eligibility-criteria#eligibility-mortgage for details.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOMG18100

Source: sofi.com

Getting Good Rate on a Car Loan

Buying a new car? Planning to get a car loan for it? Then keep the following tips in mind to get a good interest rate – and avoid the crucial mistakes that cost you even more money over the long run.

Tip #1: Don’t Get Financing at the Dealership

The vast majority of car buyers get their car loans at the same dealership where they buy the car. Their reasoning: It’s convenient, and/or the dealers give great interest rates. Do you have the same sentiment?

Here’s the problem: As attractive as the dealer’s advertised interest rates are, they’re likely reserved only for buyers with excellent credit scores. What’s more, there’s a pretty good chance you can find an even better deal elsewhere, such as with community banks and credit unions.

Our advice: Do your homework, and get your loan lined up and ready before you visit the dealer. If the dealer offers you an even better deal, you can still have the loan canceled.

Tip #2: Check Your Credit Score

Do you know your credit score? If not – and if you let the dealer come up with your car loan for you – you’re in BIG trouble! The dealer might convince you that your credit rating is worse than it actually is, and jack up your interest rates accordingly.

Get your credit score by requesting your credit ratings from TransUnion, Equifax, and Experian. You can also check your credit score by applying for preapproved car financing. Car loans from banks and credit unions can give you a pretty good idea of the vehicles and interest rate your credit score qualifies you for.

Click here to learn how you can improve your credit score. 

Tip #3: Watch Out For Scams.

Another risk you run when you let your dealer set up your financing for you is getting scammed. A common scam is carried out when, a few days after you sign the dotted line and bring your new car home, the dealer calls you and tells you the car loan “didn’t work out,” and that you’ll need to re-negotiate a new loan with a higher interest rate – or give the car back, losing your deposit in the process.

Protect yourself by getting your car loan elsewhere, or by not buying the car until you’re 100% sure the dealer’s financing is finalized.

Tip #4: Don’t Focus on the Monthly Fee

Lastly, one of the biggest mistakes car buyers make is going for the loan with the lowest monthly fees. Low monthly fees normally mean higher interest rates and longer payment periods. If you’re not careful, you might end up paying over twice the car’s value throughout the life of the loan.

Remember that there are at least two things that go into the monthly fee: The price of the car and the car loan’s premium. (If you’re trading in your old car, that’s an additional factor.) A single monthly fee won’t tell you how much of each is going into it – and there’s no way of knowing whether you’re paying too much for your loan or getting too little from your trade-in.

So if the car salesman asks you how much you can afford to pay each month – you don’t need to answer. Don’t get trapped! Focus instead on the total amount you’ll be paying for the car loan over its lifetime. It’s the best way to save money and get a decent car at the same time.

Source: creditabsolute.com

Cities with Worst and Best Credit Scores

Having a high credit score is extremely important in today’s financial world and is used by dozens of industries to determine whether you’re a risk to them or not. Credit scores are checked for hiring, renting, buying, and even when dating. We all understand how important credit scores are and, while where you live isn’t necessarily going to affect your credit score, we’ve decided to put together a list of top 20 cities with the best credit scores and the worst credit scores below.

While it’s unlikely that any location will have a direct impact on your credit score, you may want to consider that in some cities the average household is more financially stable than in other cities. If we look at the city with the highest average credit score, for instance, Minneapolis-St. Paul has an average median income of almost $70,000/year where as a city like Shreveport with a much lower average credit score, has a median income of only $42,157. So, it’s very possible that the higher incomes directly affected the credit scores as card holders were more financial stable.

Cities with the best credit

Rank Metropolitan area State Average
VantageScore 3.0
Average number
of open credit cards
1 MINNEAPOLIS-ST. PAUL MN 702 3.48
2 SIOUX FALLS (MITCHELL) SD 700 3.05
3 DULUTH-SUPERIOR MN, WI 697 3.19
4 FARGO-VALLEY CITY ND, MN 697 3.31
5 GREEN BAY-APPLETON WI 697 3.26
6 CEDAR RAPIDS-WTRLO-IWC-DUB IA 697 3.23
7 MADISON WI 694 3.23
8 BOSTON (MANCHESTER) MA, NH 694 3.60
9 LA CROSSE-EAU CLAIRE WI 692 3.13
10 BURLINGTON-PLATTSBURGH VT, NY, NH 691 3.06
11 LINCOLN – HASTINGS-KRNY NE 690 3.25
12 JOHNSTOWN-ALTOONA PA 689 3.30
13 SAN FRANCISCO-OAK-SAN JOSE CA 689 3.40
14 PEORIA-BLOOMINGTON IL 689 3.49
15 PITTSBURGH PA 688 3.65
16 PORTLAND-AUBURN ME, NH 687 3.08
17 HONOLULU HI 687 3.24
18 HARRISBURG-LNCSTR-LEB-YORK PA 685 3.50
19 ALBANY-SCHENECTADY-TROY NY 685 3.46
20 HARTFORD – NEW HAVEN CT 683 3.59

Cities with the worst credit

Rank Metropolitan area State Average
VantageScore 3.0
Average number
of open credit cards
1 HARLINGEN-WSLCO-BRNSVL-MCA TX 628 2.81
2 LAS VEGAS NV 628 3.03
3 JACKSON, MS MS 629 2.29
4 FLORENCE-MYRTLE BEACH SC 633 2.72
5 BAKERSFIELD CA 634 2.87
6 AUGUSTA GA, SC 635 2.66
7 COLUMBUS-TUPELO-WEST POINT MS, AL 635 2.38
8 SHREVEPORT LA, TX, AR, OK 635 2.34
9 SAVANNAH GA, SC 637 2.77
10 MEMPHIS TN 637 2.64
11 FRESNO-VISALIA CA 639 2.82
12 COLUMBUS, GA GA 639 2.67
13 MONROE-EL DORADO LA, AR 639 2.39
14 MACON GA 640 2.68
15 TYLER-LONGVIEW(LFKN-NCGD) TX 641 2.78
16 MONTGOMERY (SELMA) AL 641 2.70
17 TALLAHASSEE-THOMASVILLE FL, GA 642 2.54
18 CORPUS CHRISTI TX 642 2.75
19 EL PASO TX 644 2.99
20 AMARILLO TX 644 2.75

Credit score and open credit card data are from Experian. We analyzed 143 of the largest U.S. metropolitan areas.

Source: creditabsolute.com

How to Refinance Your Home Mortgage – Step-by-Step Guide

Deciding to refinance your mortgage is only the beginning of the process. You’re far more likely to accomplish what you set out to achieve with your refinance — and to get a good deal in the meantime — when you understand what a mortgage refinance entails.

From decision to closing, mortgage refinancing applicants pass through four key stages on their journey to a new mortgage loan.

How to Refinance a Mortgage on Your Home

Getting a home loan of any kind is a highly involved and consequential process.

On the front end, it requires careful consideration on your part. In this case, that means weighing the pros and cons of refinancing in general and the purpose of your loan in particular.

For example, are you refinancing to get a lower rate loan (reducing borrowing costs relative to your current loan) or do you need a cash-out refinance to finance a home improvement project, which could actually entail a higher rate?

Next, you’ll need to gather all the documents and details you’ll need to apply for your loan, evaluate your loan options and calculate what your new home mortgage will cost, and then begin the process of actually shopping for and applying for your new loan — the longest step in the process.

Expect the whole endeavor to take several weeks.

1. Determining Your Loan’s Purpose & Objectives

The decision to refinance a mortgage is not one to make lightly. If you’ve decided to go through with it, you probably have a goal in mind already.

Still, before getting any deeper into the process, it’s worth reviewing your longer-term objectives and determining what you hope to get out of your refinance. You might uncover a secondary or tertiary goal or benefit that alters your approach to the process before it’s too late to change course.

Refinancing advances a whole host of goals, some of which are complementary. For example:

  • Accelerating Payoff. A shorter loan term means fewer monthly payments and quicker payoff. It also means lower borrowing costs over the life of the loan. The principal downside: Shortening a loan’s remaining term from, say, 25 years to 15 years is likely to raise the monthly payment, even as it cuts down total interest charges.
  • Lowering the Monthly Payment. A lower monthly payment means a more affordable loan from month to month — a key benefit for borrowers struggling to live within their means. If you plan to stay in your home for at least three to five years, accepting a prepayment penalty (which is usually a bad idea) can further reduce your interest rate and your monthly payment along with it. The most significant downsides here are the possibility of higher overall borrowing costs and taking longer to pay it off if, as is often the case, you reduce your monthly payment by lengthening your loan term.
  • Lowering the Interest Rate. Even with an identical term, a lower interest rate reduces total borrowing costs and lowers the monthly payment. That’s why refinancing activity spikes when interest rates are low. Choose a shorter term and you’ll see a more drastic reduction.
  • Avoiding the Downsides of Adjustable Rates. Life is good for borrowers during the first five to seven years of the typical adjustable-rate mortgage (ARM) term when the 30-year loan rate is likely to be lower than prevailing rates on 30-year fixed-rate mortgages. The bill comes due, literally, when the time comes for the rate to adjust. If rates have risen since the loan’s origination, which is common, the monthly payment spikes. Borrowers can avoid this unwelcome development by refinancing to a fixed-rate mortgage ahead of the jump.
  • Getting Rid of FHA Mortgage Insurance. With relaxed approval standards and low down payment requirements, Federal Housing Administration (FHA) mortgage loans help lower-income, lower-asset first-time buyers afford starter homes. But they have some significant drawbacks, including pricey mortgage insurance that lasts for the life of the loan. Borrowers with sufficient equity (typically 20% or more) can put that behind them, reduce their monthly payment in the process by refinancing to a conventional mortgage, and avoid less expensive but still unwelcome private mortgage insurance (PMI).
  • Tapping Home Equity. Use a cash-out refinance loan to extract equity from your home. This type of loan allows you to borrow cash against the value of your home to fund things like home improvement projects or debt consolidation. Depending on the lender and jurisdiction, you can borrow up to 85% of your home equity (between rolled-over principal and cash proceeds) with this type of loan. But mind your other equity-tapping options: a home equity loan or home equity line of credit.

Confirming what you hope to get out of your refinance is an essential prerequisite to calculating its likely cost and choosing the optimal offer.


2. Confirm the Timing & Gather Everything You Need

With your loan’s purpose and your long-term financial objectives set, it’s time to confirm you’re ready to refinance. If yes, you must gather everything you need to apply, or at least begin thinking about how to do that.

Assessing Your Timing & Determining Whether to Wait

The purpose of your loan plays a substantial role in dictating the timing of your refinance.

For example, if your primary goal is to tap the equity in your home to finance a major home improvement project, such as a kitchen remodel or basement finish, wait until your loan-to-value ratio is low enough to produce the requisite windfall. That time might not arrive until you’ve been in your home for a decade or longer, depending on the property’s value (and change in value over time).

As a simplified example, if you accumulate an average of $5,000 in equity per year during your first decade of homeownership by making regular payments on your mortgage, you must pay your 30-year mortgage on time for 10 consecutive years to build the $50,000 needed for a major kitchen remodel (without accounting for a potential increase in equity due to a rise in market value).

By contrast, if your primary goal is to avoid a spike in your ARM payment, it’s in your interest to refinance before that happens — most often five or seven years into your original mortgage term.

But other factors can also influence the timing of your refinance or give you second thoughts about going through with it at all:

  • Your Credit Score. Because mortgage refinance loans are secured by the value of the properties they cover, their interest rates tend to be lower than riskier forms of unsecured debt, such as personal loans and credit cards. But borrower credit still plays a vital role in setting their rates. Borrowers with credit scores above 760 get the best rates, and borrowers with scores much below 680 can expect significantly higher rates. That’s not to say refinancing never makes sense for someone whose FICO score is in the mid-600s or below, only that those with the luxury to wait out the credit rebuilding or credit improvement process might want to consider it. If you’re unsure of your credit score, you can check it for free through Credit Karma.
  • Debt-to-Income Ratio. Mortgage lenders prefer borrowers with low debt-to-income ratios. Under 36% is ideal, and over 43% is likely a deal breaker for most lenders. If your debt-to-income ratio is uncomfortably high, consider putting off your refinance for six months to a year and using the time to pay down debt.
  • Work History. Fairly or not, lenders tend to be leery of borrowers who’ve recently changed jobs. If you’ve been with your current employer for two years or less, you must demonstrate that your income has been steady for longer and still might fail to qualify for the rate you expected. However, if you expect interest rates to rise in the near term, waiting out your new job could cancel out any benefits due to the higher future prevailing rates.
  • Prevailing Interest Rates. Given the considerable sums of money involved, even an incremental change to your refinance loan’s interest rate could translate to thousands or tens of thousands of dollars saved over the life of the loan. If you expect interest rates to fall in the near term, put off your refinance application. Conversely, if you believe rates will rise, don’t delay. And if the difference between your original mortgage rate and the rate you expect to receive on your refinance loan isn’t at least 1.5 percentage points, think twice about going ahead with the refinance at all. Under those circumstances, it takes longer to recoup your refinance loan’s closing costs.
  • Anticipated Time in the Home. It rarely makes sense to refinance your original mortgage if you plan to sell the home or pay off the mortgage within two years. Depending on your expected interest savings on the refinance, it can take much longer than that (upward of five years) to break even. Think carefully about how much effort you want to devote to refinancing a loan you’re going to pay off in a few years anyway.

Pro tip: If you need to give your credit score a bump, sign up for Experian Boost. It’s free and it’ll help you instantly increase your credit score.

Gathering Information & Application Materials

If and when you’re ready to go through with your refinance, you need a great deal of information and documentation before and during the application and closing processes, including:

  • Proof of Income. Depending on your employment status and sources of income, the lender will ask you to supply recent pay stubs, tax returns, or bank statements.
  • A Recent Home Appraisal. Your refinance lender will order a home appraisal before closing, so you don’t need to arrange one on your own. However, to avoid surprises, you can use open-source comparable local sales data to get an idea of your home’s likely market value.
  • Property Insurance Information. Your lender (and later, mortgage servicer) needs your homeowners insurance information to bundle your escrow payment. If it has been more than a year since you reviewed your property insurance policy, now’s the time to shop around for a better deal.

Be prepared to provide additional documentation if requested by your lender before closing. Any missing information or delays in producing documents can jeopardize the close.

Home Appraisal Blackboard Chalk Hand


3. Calculate Your Approximate Refinancing Costs

Next, use a free mortgage refinance calculator like Bank of America’s to calculate your approximate refinancing costs.

Above all else, this calculation must confirm you can afford the monthly mortgage payment on your refinance loan. If one of your aims in refinancing is to reduce the amount of interest paid over the life of your loan, this calculation can also confirm your chosen loan term and structure will achieve that.

For it to be worth it, you must at least break even on the loan after accounting for closing costs.

Calculating Your Breakeven Cost

Breakeven is a simple concept. When the total amount of interest you must pay over the life of your refinance loan matches the loan’s closing costs, you break even on the loan.

The point in time at which you reach parity is the breakeven point. Any interest saved after the breakeven point is effectively a bonus — money you would have forfeited had you chosen not to refinance.

Two factors determine if and when the breakeven point arrives. First, a longer loan term increases the likelihood you’ll break even at some point. More important still is the magnitude of change in your loan’s interest rate. The further your refinance rate falls from your original loan’s rate, the more you save each month and the faster you can recoup your closing costs.

A good mortgage refinance calculator should automatically calculate your breakeven point. Otherwise, calculate your breakeven point by dividing your refinance loan’s closing costs by the monthly savings relative to the original loan and round the result up to the next whole number.

Because you won’t have exact figures for your loan’s closing costs or monthly savings until you’ve applied and received loan disclosures, you’re calculating an estimated breakeven range at this point.

Refinance loan closing costs typically range from 2% to 6% of the refinanced loan’s principal, depending on the origination fee and other big-ticket expenses, so run one optimistic scenario (closing costs at 2% and a short time to breakeven) and one pessimistic scenario (closing costs at 6% and a long time to breakeven). The actual outcome will likely fall somewhere in the middle.

Note that the breakeven point is why it rarely makes sense to bother refinancing if you plan to sell or pay off the loan within two years or can’t reduce your interest rate by more than 1.5 to 2 percentage points.


4. Shop, Apply, & Close

You’re now in the home stretch — ready to shop, apply, and close the deal on your refinance loan.

Follow each of these steps in order, beginning with a multipronged effort to source accurate refinance quotes, continuing through an application and evaluation marathon, and finishing up with a closing that should seem breezier than your first.

Use a Quote Finder (Online Broker) to Get Multiple Quotes Quickly

Start by using an online broker like Credible* to source multiple refinance quotes from banks and mortgage lenders without contacting each party directly. Be prepared to provide basic information about your property and objectives, such as:

  • Property type, such as single-family home or townhouse
  • Property purpose, such as primary home or vacation home
  • Loan purpose, such as lowering the monthly payment
  • Property zip code
  • Estimated property value and remaining first mortgage loan balance
  • Cash-out needs, if any
  • Basic personal information, such as estimated credit score and date of birth

If your credit is decent or better, expect to receive multiple conditional refinance offers — with some coming immediately and others trickling in by email or phone in the subsequent hours and days. You’re under no obligation to act on any, sales pressure notwithstanding, but do make note of the most appealing.

Approach Banks & Lenders You’ve Worked With Before

Next, investigate whether any financial institutions with which you have a preexisting relationship offer refinance loans, including your current mortgage lender.

Most banks and credit unions do offer refinance loans. Though their rates tend to be less competitive at a baseline than direct lenders without expensive branch offices, many offer special pricing for longtime or high-asset customers. It’s certainly worth taking the time to make a few calls or website visits.

Apply for Multiple Loans Within 14 Days

You won’t know the exact cost of any refinance offer until you officially apply and receive the formal loan disclosure all lenders must provide to every prospective borrower.

But you can’t formally apply for a refinance loan without consenting to a hard credit pull, which can temporarily depress your credit score. And you definitely shouldn’t go through with your refinance until you’ve entertained multiple offers to ensure you’re getting the best deal.

Fortunately, the major consumer credit-reporting bureaus count all applications for a specific loan type (such as mortgage refinance loans) made within a two-week period as a single application, regardless of the final application count.

In other words, get in all the refinance applications you plan to make within two weeks, and your credit report will show just a single inquiry.

Evaluate Each Offer

Evaluate the loan disclosure for each accepted application with your objectives and general financial goals in mind. If your primary goal is reducing your monthly payment, look for the loan with the lowest monthly cost.

If your primary goal is reducing your lifetime homeownership costs, look for the loan offering the most substantial interest savings (the lowest mortgage interest rate).

Regardless of your loan’s purpose, make sure you understand what (if anything) you’re obligated to pay out of pocket for your loan. Many refinance loans simply roll closing costs into the principal, raising the monthly payment and increasing lifetime interest costs.

If your goal is to get the lowest possible monthly payment and you can afford to, try paying the closing costs out of pocket.

Choose an Offer & Consider Locking Your Rate

Choose the best offer from the pack — the one that best suits your objectives. If you expect rates to move up before closing, consider the lender’s offer (if extended) to lock your rate for a predetermined period, usually 45 to 90 days.

There’s likely a fee associated with this option, but the amount saved by even marginally reducing your final interest rate will probably offset it. Assuming everything goes smoothly during closing, you shouldn’t need more than 45 days — and certainly not more than 90 days — to finish the deal.

Proceed to Closing

Once you’ve closed on the loan, that’s it — you’ve refinanced your mortgage. Your refinance lender pays off your first mortgage and originates your new loan.

Moving forward, you send payments to your refinance lender, their servicer, or another company that purchases the loan.


Final Word

If you own a home, refinancing your mortgage loan is likely the easiest route to capitalize on low interest rates. It’s probably the most profitable too.

But low prevailing interest rates aren’t the only reason to refinance your mortgage loan. Other common refinancing goals include avoiding the first upward adjustment on an ARM, reducing the monthly payment to a level that doesn’t strain your growing family’s budget, tapping the equity you’ve built in your home, and banishing FHA mortgage insurance.

And a refinance loan doesn’t need to achieve only one goal. Some of these objectives are complementary, such as reducing your monthly payment while lowering your interest rate (and lifetime borrowing costs).

Provided you make out on the deal, whether by reducing your total homeownership costs or taking your monthly payment down a peg, it’s likely worth the effort.

*Advertisement from Credible Operations, Inc. NMLS 1681276.Address: 320 Blackwell St. Ste 200, Durham, NC, 27701

Source: moneycrashers.com

What to know about FICO’s new credit scoring system

A woman looks at her credit card.

Disclosure regarding Lexington Law’s editorial content.

The Fair Isaac Corporation (FICO) has announced it will be updating its credit scoring system this summer when they roll out the FICO Score 10 and 10T, which together represent the biggest change to the FICO system since 2014. 

The new system is designed to help identify high-risk borrowers by incorporating people’s history of credit behavior, paying special attention to those who use personal loans to consolidate debt but do not pay that debt down. FICO has estimated that about 110 million users will see a change in their credit score under the new FICO 10 and FICO 10T systems.

Here we’ve broken down how the new system works, what effect you can expect it to have on your score and what to do differently under the new system.

What’s Different About the New Credit Scoring System?

The new FICO scoring system allows lenders to incorporate “trended data” that shows how responsibly a borrower behaves with regard to credit. It also adjusts how important certain information is when calculating your score.

Factors weighed more heavily in the new FICO scoring model include:

  • Personal loans, especially those used to consolidate credit card debt
  • Delinquencies, especially those in the past two years
  • Credit utilization ratio
What's different about the FICO 10/10T? They weigh personal loans, history of delinquencies, and credit utilization ratio more heavily.

Will My Credit Score Change?

Though millions are likely to see their scores change as a result of the switch to the FICO 10, not all of these changes will be significant, and some users could even see their scores receive a boost. FICO representatives estimate that about 40 million—with already high credit scores—could see their credit scores increase by a small amount, with another 40 million seeing a decrease in their scores.

Consider these factors and try to predict how your score may change in the switch to the FICO 10.

You’re likely to see a drop if:

  • You’ve had recent delinquencies.
  • You consistently carry a balance on your credit cards.
  • You took out a personal loan to consolidate credit card debt.
  • You’ve maintained a high credit utilization ratio in the past two years.

You’re less likely to see a drop (and your score might even increase) if:

  • You’ve stayed current on your payments in the past two years.
  • You’ve maintained a healthy credit utilization ratio in the past two years.
  • You only put high balances on your credit cards occasionally and pay those balances down quickly.

Note: The FICO 10 will become available in the summer, but that doesn’t mean lenders will start using it right away. Many lenders still use FICO 8 or FICO 9.

What Can a 20-Point Difference Make?

According to FICO, most users whose credit scores change with the new system will see a difference of around 20 points. While that may not seem like much, a 20-point difference can be significant.

Here are three ways a 20-point drop in credit score can impact you:

1. Higher Loan Interest

Depending on where your score started, a 20-point drop can cost you significantly when it comes to taking out a home mortgage or auto loan. For example: On a 30-year fixed rate mortgage of $200,000, someone with a 660 credit score will pay about $18,000 less in interest than someone with a 640.

2. Higher Premiums on Insurance

Credit is also one of the factors that determines the amount you must pay in insurance premiums, and a 20-point difference can be significant there as well. According to insurance comparison site The Zebra, the average difference in annual premiums from “very good” (740 – 799) to “great” (800 – 850) credit is $116.

3. Weaker Loan Applications

If your credit was already on the low side, a 20-point drop may do more than increase your interest and premiums—it can actually disqualify you for a number of applications. For instance, most low-interest mortgage programs (like FHA, VA and USDA) have strict minimum credit score requirements.

Minimum credit scores for various loan programs: 500–579 for an FHA loan at 10% down, 580 for an FHA loan at 3.5% down, 620 for a VA loan, 640 for a USDA loan, and 680–720 for a jumbo loan.

How Can I Keep My New Credit Score Up?

Best practices for keeping your credit score healthy will remain unchanged even after FICO rolls out its new system. However, certain tactics will be more powerful than others using the new FICO calculations.

Here are three key tactics for maximizing your new FICO score:

1. Keep Detailed Financial Records

The new credit scoring system weighs the last two years of debt balances, so it’s important to have accurate records on all of your lines of credit going back at least that far. Keeping pristine records of your debts is the first step to identifying and solving any problems or discrepancies. 

2. Pay Credit Balances Early in the Month

Even though it amounts to the same as paying your bill once a month, paying your credit balance twice a month or even once a week can improve your credit score. By preventing your credit balance from ever getting too high throughout the month, you lower your credit utilization score, which is weighed heavily under the new system.

3. Sign Up for Boosted Credit Services

Alternative credit models like UltraFICO and Experian Boost raise users’ credit scores by incorporating “extra” data, like utility bills and rent payments. If you’re not enrolled in one of these services and you’re concerned about your score taking a plunge following the FICO 10 rollout, signing up could offset any negative impact caused by the new model.

Bottom Line: Good Financial Habits Are Always a Good Idea

When it comes down to it, good credit habits are essential, and none of the changes being made as part of the FICO scoring update are revolutionary. The same positive financial behavior that resulted in a great score with the old system will prove successful using the FICO 10 as well. 

However, those who stand to be most impacted by a 20-point change in their score—like anyone whose score is currently on the cusp of two different credit categories—may want to use this information to strategize how best to protect their score from changes. There are a number of ways to work on improving your credit health that range from simple tweaks to long-term changes to your financial habits. It’s always a good time to start prioritizing your financial well-being!


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

Why are my credit scores different? – Lexington Law

woman looking holding and looking at papers.

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

If you’ve ever checked your credit score across each of the different credit bureaus (Equifax, Experian and Transunion) or through multiple credit monitoring sites, you may have noticed some differences in points.  

Credit scores are three-digit numbers that range from 300 to 850 and are based on five main factors—payment history, credit utilization, length of credit history, types of credit and new credit. Though these factors remain pretty consistent across all scoring models, you may not see the exact same score from every credit reporting agency. 

The difference in scores can seem confusing, making it difficult to understand the credit score range you fall under. Luckily, a difference in scores is common and doesn’t have a huge impact on qualifying for new lines of credit. The important thing is that the same general information is evaluated across all credit agencies. 

In this guide, we’ll answer why your scores may be different, when to be concerned about any discrepancies and which credit scores matter most to lenders. 

Why are my credit scores different on different sites? 

When checking your credit score, different sites may populate different scores. For example, some 3rd party sites report scores from TransUnion and Equifax. These scoring models generally use VantageScore 3.0, which may pull a different score than your bank which offers you free access to your FICO score. 

It primarily comes down to what scoring model is being used. There are many different types of credit scores, but they use two main scoring models—FICO Score and VantageScore. 

FICO Score vs. VantageScore  

Though each credit scoring model is based on similar factors, the impact of the factors on your credit score differs from model to model. 

Your FICO score is based on the following factors:  

  • Payment history (35 percent)
  • Amount owed (30 percent)
  • Length of credit history (15 percent) 
  • New credit (10 percent) 
  • Credit mix (10 percent)

The factors that impact your VantageScore are: 

  • Total credit usage, balance and available credit (extremely influential)
  • Credit mix and experience (highly influential) 
  • Payment history (moderately influential)
  • Age of credit history and new accounts (less influential)

As you can see, the information gathered for each scoring model is the same, with some information weighing more heavily than others. For example, payment history is the biggest factor making up your FICO score, but it’s only considered moderately influential when calculating your VantageScore. 

5 reasons your credit scores are different 

Now that we understand exactly what each credit scoring model looks at, let’s dive into why your credit scores can differ. 

Factors influencing a difference in credit scores: credit scoring model used, information reported to credit bureaus, date when your score was pulled, credit score version used, errors on your credit report.

1. Your score was calculated using a different scoring model

As mentioned, your credit score can be calculated using one of the two main credit scoring models—FICO and VantageScore. Your score could appear different because of the difference in the calculations mentioned above. If you were late on a payment, your FICO score could be majorly impacted, but your VantageScore may not see the same drop. 

2. Information varies between credit bureaus

Credit scores are calculated by using the information that appears on your credit report, which comes from one of the three credit bureaus. When lenders report information regarding your accounts to the credit bureaus, they’re not required to report to all three—some may even report to only one. 

Information that may appear on your report from one credit agency may not appear on another. Because of this, each of the three bureaus can have different information on their reports, resulting in a potential difference in scores. 

For example, if Experian had a record of a payment you missed but the other bureaus didn’t, a score based on your Experian report would likely be lower than a score based on the other bureaus’ reports. 

3. Different credit score version

On top of there being different credit score models, there are also different versions of credit scores. For example, FICO uses different scores depending on the type of loan you’re applying for. If you’re applying for an auto loan, the lender may look at your FICO Auto Score. Or, if you’re applying for a credit card, credit card issuers may look at your FICO Bankcard Score. 

If you’re looking to obtain one of these kinds of loans, you’ll want to know your industry-specific scores ahead of time. While the FICO Score 8 model is most widely used, it’s up to each lender to decide which score they will use when determining your creditworthiness. 

Credit score versions are updated every few years when needed. When a new version is rolled out, certain lenders may be slow to adopt the new versions or may choose not to. Because each updated version has slightly different scoring methods, this could cause a difference in credit scores. 

4. Your credit scores were recorded at different times

Though your credit report is updated monthly, the time at which your credit score was calculated can vary. As new information is reported to the credit bureaus and your report is updated, your credit score can change. Because of this, your credit score can look different simply because it was calculated on an earlier or later day. 

If your credit score was calculated on one day, but new information regarding your credit was reported a day or two later, there could be a difference in scores. 

5. There are errors on your credit report 

As mentioned, information can be reported to credit agencies, but lenders don’t always choose to report to all three. There could be a difference in your scores if errors or inaccuracies appear on one credit report, but not the others. If this is the case, you’ll want to dispute these errors to avoid further impact on your credit score. 

When checking your credit report, you’ll want to look at the following: 

  • Late payments and charge-offs
  • New accounts
  • Increases in card balances 
  • Decreases in card balances 
  • Hard inquiries 
  • Collections 

Which credit score matters to lenders? 

Though each lender has their own method of determining creditworthiness, FICO is one of the most used credit scoring models. In fact, 90 percent of lenders use the FICO scoring model when making lending decisions. While FICO remains the most widely used scoring model, you should still monitor your other credit scores since the models used vary from lender to lender. 

Can your credit score be wrong?

Yes, there is a chance your credit score could be wrong because of fraudulent activity or an error on your credit report. If you see a major point difference between your credit scores, you may want to look a little further into what happened. You can do this by accessing each report and analyzing it for errors and discrepancies. If the information on your credit reports is inconsistent, you may need to look into this further. 

If information that can significantly impact your credit score—like paying off a large amount of debt or noticing an error in payment history—is only reported to one credit agency, you’ll definitely want it reported across all bureaus. You can do this by filing a dispute or submitting a rapid rescore. 

Remember, you can access one free annual credit report from each of the three credit bureaus by visiting www.AnnualCreditReport.com. 

Not all credit scores will be the same, but you do want to be sure you’re properly monitoring your credit report so you understand all of the factors impacting your credit score. Small differences in credit scores are nothing to worry about. Focus on maintaining positive credit habits so you can set yourself up for success when qualifying for new lines of credit and loans. 


Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.

Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

What to know about FICO’s new credit scoring system – Lexington Law

A woman looks at her credit card.

Disclosure regarding Lexington Law’s editorial content.

The Fair Isaac Corporation (FICO) has announced it will be updating its credit scoring system this summer when they roll out the FICO Score 10 and 10T, which together represent the biggest change to the FICO system since 2014. 

The new system is designed to help identify high-risk borrowers by incorporating people’s history of credit behavior, paying special attention to those who use personal loans to consolidate debt but do not pay that debt down. FICO has estimated that about 110 million users will see a change in their credit score under the new FICO 10 and FICO 10T systems.

Here we’ve broken down how the new system works, what effect you can expect it to have on your score and what to do differently under the new system.

What’s Different About the New Credit Scoring System?

The new FICO scoring system allows lenders to incorporate “trended data” that shows how responsibly a borrower behaves with regard to credit. It also adjusts how important certain information is when calculating your score.

Factors weighed more heavily in the new FICO scoring model include:

  • Personal loans, especially those used to consolidate credit card debt
  • Delinquencies, especially those in the past two years
  • Credit utilization ratio
What's different about the FICO 10/10T? They weigh personal loans, history of delinquencies, and credit utilization ratio more heavily.

Will My Credit Score Change?

Though millions are likely to see their scores change as a result of the switch to the FICO 10, not all of these changes will be significant, and some users could even see their scores receive a boost. FICO representatives estimate that about 40 million—with already high credit scores—could see their credit scores increase by a small amount, with another 40 million seeing a decrease in their scores.

Consider these factors and try to predict how your score may change in the switch to the FICO 10.

You’re likely to see a drop if:

  • You’ve had recent delinquencies.
  • You consistently carry a balance on your credit cards.
  • You took out a personal loan to consolidate credit card debt.
  • You’ve maintained a high credit utilization ratio in the past two years.

You’re less likely to see a drop (and your score might even increase) if:

  • You’ve stayed current on your payments in the past two years.
  • You’ve maintained a healthy credit utilization ratio in the past two years.
  • You only put high balances on your credit cards occasionally and pay those balances down quickly.

Note: The FICO 10 will become available in the summer, but that doesn’t mean lenders will start using it right away. Many lenders still use FICO 8 or FICO 9.

What Can a 20-Point Difference Make?

According to FICO, most users whose credit scores change with the new system will see a difference of around 20 points. While that may not seem like much, a 20-point difference can be significant.

Here are three ways a 20-point drop in credit score can impact you:

1. Higher Loan Interest

Depending on where your score started, a 20-point drop can cost you significantly when it comes to taking out a home mortgage or auto loan. For example: On a 30-year fixed rate mortgage of $200,000, someone with a 660 credit score will pay about $18,000 less in interest than someone with a 640.

2. Higher Premiums on Insurance

Credit is also one of the factors that determines the amount you must pay in insurance premiums, and a 20-point difference can be significant there as well. According to insurance comparison site The Zebra, the average difference in annual premiums from “very good” (740 – 799) to “great” (800 – 850) credit is $116.

3. Weaker Loan Applications

If your credit was already on the low side, a 20-point drop may do more than increase your interest and premiums—it can actually disqualify you for a number of applications. For instance, most low-interest mortgage programs (like FHA, VA and USDA) have strict minimum credit score requirements.

Minimum credit scores for various loan programs: 500–579 for an FHA loan at 10% down, 580 for an FHA loan at 3.5% down, 620 for a VA loan, 640 for a USDA loan, and 680–720 for a jumbo loan.

How Can I Keep My New Credit Score Up?

Best practices for keeping your credit score healthy will remain unchanged even after FICO rolls out its new system. However, certain tactics will be more powerful than others using the new FICO calculations.

Here are three key tactics for maximizing your new FICO score:

1. Keep Detailed Financial Records

The new credit scoring system weighs the last two years of debt balances, so it’s important to have accurate records on all of your lines of credit going back at least that far. Keeping pristine records of your debts is the first step to identifying and solving any problems or discrepancies. 

2. Pay Credit Balances Early in the Month

Even though it amounts to the same as paying your bill once a month, paying your credit balance twice a month or even once a week can improve your credit score. By preventing your credit balance from ever getting too high throughout the month, you lower your credit utilization score, which is weighed heavily under the new system.

3. Sign Up for Boosted Credit Services

Alternative credit models like UltraFICO and Experian Boost raise users’ credit scores by incorporating “extra” data, like utility bills and rent payments. If you’re not enrolled in one of these services and you’re concerned about your score taking a plunge following the FICO 10 rollout, signing up could offset any negative impact caused by the new model.

Bottom Line: Good Financial Habits Are Always a Good Idea

When it comes down to it, good credit habits are essential, and none of the changes being made as part of the FICO scoring update are revolutionary. The same positive financial behavior that resulted in a great score with the old system will prove successful using the FICO 10 as well. 

However, those who stand to be most impacted by a 20-point change in their score—like anyone whose score is currently on the cusp of two different credit categories—may want to use this information to strategize how best to protect their score from changes. There are a number of ways to work on improving your credit health that range from simple tweaks to long-term changes to your financial habits. It’s always a good time to start prioritizing your financial well-being!


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com