5 Steps to a Credit Makeover
Credit is Money! Think about it whether renting a new apartment, applying for a credit card, a mortgage or even Insurance (Yes Insurance!) your credit score will determine the interest rate or premium you are quoted. Today your credit score is a filter that many industries use to decide if they want to do business with you and at what price. The most common credit score used and discussed is the FICO score, created by the Fair Isaac Corporation. FICO is the standard for the mortgage industry as well as many others, and it can range from a low of 350 to a high of 850. The higher the score the lower the interest rate you will be offered, potentially saving you hundreds. In today’s market in order to purchase a home your credit score must be at least a 600. How a score is determined is one of the most commonly asked questions. While we do not know the exact formulas used by Equifax/Beacon, Transunion and Experian- the 3 biggest credit agencies that use FICO’s Standard of scoring, the following is what we do know…
Five Keys of a Great Score:
Your payment history, or how you pay your bills, makes up 35% of your score. How much you owe is 30% and how long you have had credit is another 15%. The type of credit you have and any new credit issued make up 10% each. Factors that are NOT considered in this formula are your income, savings, age, race, geographic location or marital status. Basically the score indicate your track record of making payments to companies you owe money to.
1-Payment History: The largest factor is “paying your bills on time.” Having a late on your credit report means that specific account is 30 days or more past its due date. The more lates you have the lower your score will get. If you have a bill that is 60, 90 or even 120 days late your score will rapidly decrease. As time progresses from the time you were late your score will improve over time. The mortgage industry has two major thresholds when looking at late payments on your report: are they older than 12 months? In addition, a mortgage late is much more serious than a credit card late. If you have late payments in your history contact your creditors that have reported the late’s and request a good faith adjustment, this actually removes the record of late payments reported. Be persistent but kind and polite, if they refuse to remove the late payments at first, remind them that you have been a good customer that would appreciate their help. Call several times if needed ask for supervisors, persistence and politeness pays off.
2-Debt/Amount owed: While installment debt (auto loans and mortgages) are factored into your scores, it’s really your credit card debt that’s important. The balances that you carry on your credit cards can affect your scores almost as much as whether or not you make your payments on time. This category calculates the proportion of balances to credit limits on your revolving credit card accounts- also known as Revolving utilization. Simply put the higher your revolving utilization percentage, the fewer points you will earn in this category. To determine your revolving utilization, you’ll need to add up all of your current balances and all of your current credit limits on your open revolving credit accounts (except home equity lines of credit). This will give you your total revolving utilization percentage See example below:Total Balances Total Limits Total Revolving Utilization %$10,000 ÷ $20,000 = 0.50 x100 50%
Remember, the lower your utilization percentage, the more points you’ll earn and the higher your credit score will be. Having a credit card with a large limit can be a good thing as long as you are not near that limit. To earn the most possible points in this category, you should try to keep your revolving utilization at 10% or less. If you can’t reach 10% just remember that the lower the better. Another way of lowering your utilization is calling the credit card companies and getting your limits increased. How you pay your bills and your revolving utilization are by far the most important factors used to determine your score.
3- Duration/ Age of credit: The age of your credit history is determined by the “date opened” on the oldest account listed on your credit report. The older or longer a particular account is open and active the better your score will be, assuming of course good payment history on this account. There is not much you can do to improve this category just wait for it. As your reports get older your points increase. NEVER CLOSE OR REMOVE OLD, GOOD ACCOUNTS FROM CREDIT REPORTS. If you have short or limited credit history ask someone to add you to their credit account as an authorized user or joint account holder, the activity on this account will then report to your credit report.
4- Type: Have a mixture of different types of accounts in your credit report. This includes Mortgages, auto loans, installment loans, credit cards, etc. If your credit report is dominated by one type of account or lack of others, this could negatively affect your credit score.
5- New Credit: When you apply for credit you are giving the lender permission to pull your credit reports and credit scores. Each time this happens, your credit report will reflect what is called an “inquiry.” To do good in this category only apply for credit when you really need it.
Monitor your credit at a reliable site like AnnualcreditReport.com twice a year and report any inaccurate information to the payee and credit agencies. If you have poor credit history or if there is inaccurate information on you reports you may want to seek help from a credit repair company. Point Gain is a local credit repair company here in Idaho; Contact them for additional information. No matter what has happened to your credit in the past there are always ways to turn your credit around in the right direction. Make sure and contact your financial adviser or mortgage lender for any additional questions you may have.
Once you and your credit are in a position to purchase a home you can start your search here at www.IdahoHomeShop.com or contact me today!