Credit Scores—What Do They Mean and How are They Changing?

Credit scores, every U.S. adult has one. But what do they mean, and how does your credit score affect you?

Credit scores may seem complicated, but they’re really just a summary of your financial history. Keep reading to learn why curating and maintaining a good credit score is best for you.

What Is a Credit Score?

The Fair Isaac Corporation, also known as FICO, launched the first credit score model with Equifax in 1989. A credit score is a number rating between 300 and 850 used to determine a consumer’s creditworthiness. Other credit-scoring systems exist. However, financial institutions most widely use the FICO score.

What Determines Your Credit Score?

The higher your credit score, the better a consumer looks to potential lenders. FICO bases its credit score model on:

  • Payment history – accounts for 35% of a credit score; shows if an individual pays their bills on time
  • The total amount owed – accounts for 30% of a credit score; considers the percentage of credit available to an individual that the individual is currently using
  • Length of credit history – accounts for 15% of a credit score; the longer the credit history, the more information there is to determine payment history
  • Types of credit – accounts for 10% of a credit score; shows if an individual has a mix of installment credit and revolving credit
  • New credit – accounts for 10% of a credit score; factors how many accounts an individual has, how many accounts they have recently applied for, and when they opened the most recent accounts

How Does Your Credit Score Affect You?

Credit reporting companies separate credit into five categories:

  1. Excellent (800 to 850)
  2. Very Good (740 to 799)
  3. Good (670 to 739)
  4. Fair (580 to 669)
  5. Poor (300 to 579)

An excellent credit score will help you get lower-rate loans, better car insurance rates, and easier approval to rent a property. A person’s credit score may also determine how much of a deposit one may need to put down for a smartphone, cable service, or utilities.

How Are Credit Scores Changing?

Four significant changes are coming this year.

  • Removing Most Medical Debt from Credit Reports

Starting July 1, 2022, medical collection debt that you paid (bills that were given to a collection agency but eventually paid) will no longer appear on credit reports. Also, starting July 1, consumers will have one year to fix insurance or billing issues before the unpaid medical debt is reported on their credit files. Currently, this period is only six months.

Also, in the first half of 2023, credit bureaus are to start omitting all medical collection debt under $1,500 from credit reports. This is estimated to remove about 70% of medical collection debt from credit reports.

  • BNPL Accounts to Be Added to Credit Reports

BNPL, or buy now, pay later, allows consumers to purchase items through installments that span several weeks or months, usually with no interest. However, the credit bureaus may classify BNPL accounts as short-term loans, which can lower your score. This is terrible news for the nearly 100 million U.S. adults that used BNPL over the past year.

  • Free Credit Reports Through 2022

During the beginning months of the pandemic, credit bureaus began to offer free weekly credit reports. Before the pandemic, you could only receive one free report from each bureau per year.

While this offer was supposed to expire as of April 20, 2022, credit bureaus have extended it to last through December 31, 2022.

It’s beneficial to check your report at least once a year. However, if you are a victim of identity theft or know that you have debt that needs to be paid, it’s best to check your score periodically to ensure it hasn’t gone down for a reason you’re not aware of.

  • Transitioning to FICO 10

In January of 2020, FICO updated its model from FICO 8 and FICO 9 to FICO 10. “The new FICO score is reported to give more weight to rising debt levels, higher debt utilization (the ratio of the amount you borrow relative to the amount of credit available to you), and late payments. Unsecured personal loans are also being reconsidered,” according to Schwab.

It’s expected that this new FICO model will cause points to fluctuate about 20 points in either direction. If you already have excellent or very good credit and take steps to build it, you have nothing to worry about. These changes are expected to widen the gap between those with good credit (670-739) and those with bad credit (below 580).

Why Do You Need a Good Credit Score?

Good credit makes it easier for you to get approved for better credit cards and loans for purchasing things like cars and homes. Without a good credit score, you risk higher interest rates, smaller loans, or not even getting approved for a loan at all.

To improve your credit, you should:

  • Pay your bills on time
  • Up your credit line
  • Keep credit card accounts open (even if you don’t use them)
  • Only open new lines of credit periodically (not all at once)
  • Work with a credible credit repair company

Prepare For Your New Home Today!

Excellent credit is vital in obtaining a loan for your dream home. Check your credit score periodically and follow the steps listed above, and you should be golden when it comes time to make a big purchase.

At The Massey Team at Berkshire Hathaway HomeServices Select Properties, we can help you take that giant leap into the unknown waters of home buying and owning. We know it can seem intimidating at first but trust our expertise, and we’ll help you every step of the way.

To view our current listings, visit our website today! If you would like to contact a team member, call us at (618) 791-5024 & (618) 791-9298.

What Is Title Insurance?

When buying a home, one of the most vital steps in securing ownership is obtaining the title. Obtain title refers to the buyer receiving ownership rights for the property from the seller. So, why would you need a title insurance policy? Keep reading to find out.

Why Do You Need Title Insurance?

Generally, title insurance is an insurance policy that protects homebuyers and lenders from a bad title. A bad title could mean there are outstanding liens, back taxes, and/or conflicting wills. Overall, a title insurance policy protects the buyers when the title to a property is invalid.

How Does Title Insurance Work?

There are two types of title insurance:

Owner’s title insurance

You are not required to purchase owner’s title insurance, but it is highly recommended. It can protect you from:

  • Conflicting ownership claims
  • Outstanding liens, lawsuits, and other encumbrances that invalidate the seller’s legal claim to the property
  • Flawed or fraudulent records
  • Undisclosed easements or other agreements that might limit the use or reduce the value of the property

Trust us; it’s wise to purchase owner’s title insurance. You don’t want to be stuck with extra fees, fines, and more leftover from the previous owner. Owner’s title insurance is a one-time fee that lasts as long as you own your home. So, we think it’s definitely worth it!

Lender’s title insurance

A lender will almost always require a borrower to purchase lender’s title insurance before receiving a home loan. The title company will typically issue the policy once they have concluded their title search.

Lender’s title insurance does everything that owner’s title insurance does, except it protects the lender against potential losses if the seller cannot legally transfer title rights. The policy will cover the lender up to the amount of the mortgage.

What Is Warranty of Title?

Warranty of title is an alternative to title insurance. It’s a guarantee by the seller that they have the legal right to transfer ownership to the buyer. If this turns out to be false (someone else also has a claim on the property), the warranty permits the buyer legal recourse against the seller.

Most transactions already include a warranty of title by default. However, it’s always vital to check.

How Much Does Title Insurance Cost?

It can cost anywhere between $500 and $3,500, depending on your geographic location and how clean the title is. If a title has too many defects, the title company may decline to offer a policy.

How Do I Get Title Insurance?

Many real estate companies will recommend a title company you can work with. However, you are always free to choose one of your own.

Typically, the process occurs in two steps:

  1. A title company performs a title search. This search ensures that the property you’re purchasing has a clear title, which means the seller owns the property and has the legal right to sell it.
  2. After the company finishes the search, it will assess any issues and potential previous undiscovered ones. They will base their quote on these issues.

Find Your New Home Today!

The Massey Team at Berkshire Hathaway HomeServices Select Properties will help ensure that you are well protected during and after the homebuying process. We want to make this process as straightforward and fun as possible. Buying a new home is an exciting time that shouldn’t be marred with the worry that back taxes or liens will rear their ugly heads.

If you’re in the market for a new home, you’ve come to the right place! Visit our website today to view our listings.

Do you want to get in contact with a team member? Give us a call at: (618) 791-5024 & (618) 791-9298.