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Now that that’s out of the way we can get onto the good stuff. I believe it is fair to say that you, like most people, would love to have the best credit score attainable. Maybe you have a good score now but just want to know how you can improve it so you can have the best mortgage possible. Maybe you have a low score and have no idea where to start. In this post and in the next I will go over some simple ways to improve your score and get you on the track to home ownership.
We are going to first discuss what a credit score is and how it affects you.
What is a credit Score?
Before we go there let’s discuss credit bureaus. Credit bureaus are reporting agencies that collect credit information. There are three main credit bureaus that collect this data. The “Big Three” are Equifax, TransUnion, and Experian. After the credit information is collected, it is then compiled into credit reports that are sold to financial institutions. A credit score is basically a numerical representation of your credit worthiness based on these reports. These scores range between 300 and 850. As you probably already know the higher the better.
Where do you fit?
Once you know what your credit score how do you know if it is a good score or not? While you may currently fall into one of the categories below it doesn’t mean that is where you will be forever. This is just a generalized idea of where you may be standing.
• Excellent Credit: 750+
• Good Credit: 700-749
• Fair Credit: 650-699
• Poor Credit: 600-649
• Bad Credit: below 600
How is my score calculated?
There are 5 categories that effect your score.
- Payment History – (accounts for 35% of most scores) Have you made your payments on time?
- Credit Utilization – (accounts for 30% of most scores) This formula calculates the amount of credit that is being used out of your credit limits as a whole.
- Length of Credit History – (accounts for 15% of most scores) How long have you had a credit card?
- Mix of Accounts – (accounts for 10% of most scores) Creditors like to see multiple types of credit. These may include revolving credit like credit cards and installment loans such as a mortgage or vehicle loan.
- New Credit Inquiries – (accounts for 10% of most scores) The frequency you apply for a new loan or credit card.
If your credit falls at 680 or less you may have trouble finding financing for a home or getting a preferred rate. Your priority to maximize lending opportunities should be to raise your score as much as possible. Don’t worry I will go over tips in my next post of this series.
How does my credit score affect me?
The better your score the better your rates. It is as simple as that. If you have good credit and are buying a new home for $300,000 with a 30-year mortgage (fixed) you could end up paying up to $90,000 less than someone with bad credit (over the term of the loan). Also, some utility down payments will be based on your credit score.
There are also some common myths that you need to be aware of.
Checking your credit report will hurt your score
If you check your own report, it will not affect your credit score. It’s called a “soft inquiry”, meaning it will only show up on your personal credit report. This is different than when you apply for credit. When this happens a “hard inquiry” will then be added. Expect these to affect your score.
My credit score is bad so I can’t get a loan
Not necessarily true. There are programs out there and loans available that may help you get into a home. For instance, I work with a builder who offers credit help. If you are going to be purchasing a home, they can pre-qualify you and then work on your credit while your home is being built. If you are ready to find out if you can be pre-approved for a loan please let me know and I can direct you to a loan officer best suited for your needs, keeping in mind I am not being paid to refer you to any lender!
An agent won’t work with me if I have poor credit
Yes and no. Some agent won’t. I will however. I can help find a loan officer or a credit repair company that is right for you. Also expect me to stay in contact with you while you work on your score and keep you updated on the market. Then when you are ready we will be able to move forward quickly and at ease.
My income affects my credit score
Some people worry that they don’t make enough to get a loan and that a low paying job affects their score. Your yearly income does affect the amount you can get on a loan but it will not decrease or increase your credit score. Again, your income does not affect your credit score.
Remember a strong credit history takes time and consistency to build. Whether you interested in a home in Epperson or elsewhere, knowing your credit score is a good place to start on the path to home ownership.
Stay tuned for next week’s article on Part 2 of Credit 101!
If you can’t wait and have questions now feel free to contact me.