If you're looking for financing, your credit score will affect several factors including the amount you can borrow and the interest rate you will pay. That credit score will give you access to financing for a house, a car, college tuition, store credit and more. A higher score will put you in a lower risk category of borrowers. A lower score will lead to higher interest rates and fees. So it's important to understand what goes into a credit score.
Capacity Used: 30% Also called a debt ratio, this is the outstanding balances on your credit lines. It marks the difference between your available credit and how much you've used. Keeping the outstanding balance below 30% of the maximum is key when considering a mortgage in the next 6 months or less.
Length of Credit History: 15% Lenders want to see a track record of credit history. A longer history of solid payments and credit makes you a stronger borrower.
Types of Credit Used: 10% Just like you want a diverse investment portfolio, a mix of credit is desirable. A mix of auto, credit cards and mortgages is better than just credit card debt.
Past Credit Applications: 10% Inquiring on your credit report often can impact your score. In the span of a year, each inquiry (up to 10) can impact your score as much as 5-to-30 points, depending on the credit reporting service. So it's good to wait on pulling credit until you're ready to act.
Credit Reports and Your Rights
Your credit report is yours, and you have the right to know what's on it. Thanks to the government, you actually have the legal right to get your credit report once a year from each of the 3 credit bureaus. That means you can actually check your credit report 3 times per year.
Stagger Reports
While you're entitled to one report from each of the credit bureaus every year, it's a good idea to space them out over the course of that year. For instance, start the year with a report from Equifax. Four months later you could check in with Experian. Wait another 4 months and check in with TransUnion for the latest on your credit history. This way you're keeping a constant watch over your credit history and the safety of your identity (This is simply an example. You can check with any of those credit bureaus in any order you'd like).
Don't Pay For It
Getting your credit report should be free. Quite often, the commercials you see and hear talk about free credit reports, but many of these actually require a fee or enrollment in order to see what's yours: your credit history. Instead, the government helped set up the website Annual Credit Report so getting your report is actually free.
It's Your History, Not Your Score
Checking with Annual Credit Report will give you your credit history. It does not give you your FICO score. If you want to find out your actual credit score, you will need to pay a service fee. However, you have an option. Talk to a trusted mortgage advisor. They should be able to explain the report and help you determine your score. It's typically part of the service a lender will offer.
I Paid My Bills. Why Did My Score Drop?
Seemingly innocent actions by a consumer can have unintended consequences on a credit score. Working with someone who has experience in the world of credit and finance can help keep your FICO score on solid footing. Even when you're working hard to keep your score up, you may inadvertently drop your score. Let's look at 4 reasons your actions could negatively impact your credit.
One Day Late. Paying a bill even one day late could get you slapped with a 30-day late notice. Creditors generally don't distinguish between one day and 30 days. Late is late in many financial company's eyes.
Paying Off Old Collections. An old collection on your credit report may not affect your credit score. Paying it off might actually bring the account "recent" and punish you with a lower credit score. While it may seem unfair, the credit scoring model puts more emphasis on your recent activity than your past. Paying off an old debt makes it look like it's new. Hold off on these until you talk to your mortgage professional.
Paying Off a "Maxed Out" Balance. If you max out a credit card, but pay it off at the end of the month, your score could still suffer. Maxing out an account adjusts your credit ratio. So even paying it off in the same month could end up showing your current status as "at the limit." This raises your debt-to-income level and lowers your credit score.
Paying Off and Closing an Account. Paying off debt is a good thing. But hold off on closing the account. Remember, there are 5 factors that go into determining your credit score. This means credit history and "types of credit" you could suffer a score drop if you close your account. After all, some of your biggest debt load could be your oldest.
Because credit is one of the most valuable tools you have at your disposal when it comes to the mortgage process, consider working closely with someone to make sure your credit score is stable and viewed as a good score. Let us know what other questions you have, and how we can help.
4 Steps to Rebuilding Credit Now
You've heard the stand-by advice that negative credit stays on your "record" for 7 years. While it is true that credit reports go back 7 years or more - public records like bankruptcy, judgments or tax liens can last up to 10 years - it doesn't mean that all is lost when it comes to rebuilding your credit. You have several options when it comes to making a positive impact over the next year. In fact it's possible that you could even qualify for a purchase or refinance in the next 6-to-12 months. Below is a look at 4 steps to get you on the road to recovery.
Monitor your credit. Get your credit report and look it over. Dispute any discrepancies. Then work with a professional to take the next step in improving your credit standing. Working with a mortgage consultant will get you started. Ask if your advisor knows a professional credit repair company they trust if you need more in-depth help on your credit history.
Use credit cards sparingly. Long-term credit cards show a good credit history (long history), which is 15% of your credit score. But use credit sparingly. Keep debt at least 30% below the limit in order to keep your debt-to-income levels manageable. Use your cards for items you can pay off at the end of the month, and make the payments on time. This can help build a strong credit history.
Open a secured credit card if you don't have one. The key to this step is secured. This means you deposit funds (often less than $500) into the account to begin with. It puts you in a low-risk category since you have skin in the game. Be sure to pay the bill on time every month, to show a stabile credit history. {Another option for some borrowers would include opening a credit account with a co-signer. Just remember, you and the co-signer are responsible for the debt. So if your partner makes bad decisions, you get punished as well. Also, "authorized user" doe not equal co-signer. Simply authorizing someone on an account in good standing has no impact on that users credit history.}
Talk to a mortgage consultant before making any debt decision. In the months leading up to signing into a mortgage, any major credit activity should stop. This includes new debt, paying off old collections or closing accounts. It's important to talk to a mortgage consultant to make sure any activity you're considering will not negatively affect your credit score.
Getting ready for a mortgage - whether it's a refinance, your first home or a "next-step" house - can take time and effort. Talking to a mortgage consultant with experience in the world of credit will help get you avoid credit mistakes.
Free credit report: Annual Credit Report
As the Multimedia Marketing & Communications Specialist at AmeriFirst Home Mortgage, Dan is responsible for creating and editing the content in the company blog. Concentrating on first time home buyers with several programs, and home improvement & renovation loans through the FHA 203k program, AmeriFirst Home Mortgage looks to bring the dream of home ownership to life in its communities.
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