Any time you check your credit score it’s like getting a snapshot at a particular time, when really, your score fluctuates up and down, based on your credit patterns. Most of the time, however, a credit score doesn’t change very much from month to month. Understanding what goes into a credit report will help you learn how to improve your credit score.
As well as fluctuating scores, there are other nuances related to credit scoring. There are several different types of scores. Of all the vendors who might pull your credit, they all use a different matrix. A mortgage lender will use a more different method than a car dealer, or a retail store, when sizing up your credit-worthiness.
It’s a good idea to check your credit score periodically, about twice a year, and about 6 months before you buy a home. (You can get one free credit report per year from the top three credit bureaus, Experian, TransUnion, and Equifax.) If you find that your score needs improvement, you have time to take the steps to improve your score. By taking the correct steps, you can improve your credit score in 6 months.
This is called Credit Score Enhancement. You can educate yourself and work proactively to improve your credit score, or you can hire a professional. Sometimes, if you have lot of clean-up to do, hiring a professional credit counselor is a wise step. You’ll make progress most efficiently and sooner than if you diy. A professional knows where and how to best approach negative aspects of your credit history.
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Knowing How Your Score Works
There are many benefits to keeping a good credit score. If you aren’t ready to buy a home yet, there are still advantages to a good score. Good credit scores effect the interest rates you pay, your likelihood of rental approval, and even your job prospects.
Keeping track of your credit score and understanding how it’s basically calculated can help you build a good score and maintain it. I recently attended a class with a lender and got some great information about credit scores. Here are my notes:
Credit Scores are made up of 5 sub-scores, which all need to be kept in good shape over time:
1. Payment History …………..35% Bills should be paid as agreed the most recent 6 months. The highest weight is put on the highest payments, mortgage, car payments, etc. Having a long history of paying your bills on time is the top way to improve your credit score.
2. Balances Carried …………..30% Keep your balance to a ratio as low as possible. Outstanding balances should be less than 30% of the available credit. Over 50% is not so good. For example, if you have a credit card with a $3,000 limit, you shouldn’t have more than a $1,000 balance. Spread the balances between cards, don’t have all the balance on one card with the others at zero.
3. Credit History ………………15% The longer the credit history the better. Long credit history paid, as agreed has a positive impact on your credit score. So don’t close old accounts, especially if they have a long history, that has a negative impact on credit score.
4. Mix Of Accounts ……………10% It is ideal to have installment and revolving accounts. Mortgage loan, auto loan, 3 to 5 credit cards (more is ok, too), paid on time over 1 to 2 years. A HELOC should be greater than $40,000 or it will report as a revolving account versus a mortgage. (You don’t have to have them all at once, however. A mix of credit accounts over the years is ideal)
5. Inquiries ……………………..10% If you are applying for a mortgage, you are allowed a number of credit inquiries for 14 days, after that inquiries can cause you to lose points. Be aware that constantly applying for credit will cause a lower score. You are allowed to pull 1 credit report each year for your own knowledge, which is a good idea to keep aware of what is going on with your credit score.
Inquiries that don’t hurt the score: Job related, insurance/utilities, account review, personal (www.annualcreditreport.com) and pre-approved offers in the mail.
Depending on the lender, the emphasis on each of these five aspects of your history may be different. Some lending institutions may go further back into your history than others.
Credit Score Enhancement Basics
1. Pay your bills on time. (35%) Most scoring models take into account how late a payment is, how recently the late payment occurred, and how many late payments there are in total. Once you have a late payment, the damage is done. The negative impact of the late payment will dissipate with time, (it will stay on the report for 7 years) and late payments involving smaller amounts are not as significant as those with larger amounts.
Managing your payments well over a period of time is the best thing you can do. Ever. This part of the scoring, more than any, measures your creditworthiness. Consistency matters in keeping your credit healthy.
2. Limit outstanding debt. (30%). Most of the models take into consideration the ratio of the amount of debt you have to the amount of credit you have available to you. [debt/available credit] Ideally, you should keep that amount to 30% or lower. The higher the ratio, the more negative the score. Owing a lot of money on your accounts can indicate that you are over-extended.
Having a small balance and making at least the minimum payment is the way to show that you use credit responsibly, and is actually better than having no balance at all.
Check to make sure that your revolving accounts are reporting your credit; it does no good to have the credit if it is not being reported.
If you can be disciplined not to use it, request an increased credit limit periodically. This will decrease the ratio because you’ll have more available. Just be sure not to use it. Most credit cards will be happy to extend more credit to you if you have proven to be responsible with what you have. This part of credit scoring is almost as weighty as your overall history, and is the second most influential aspect to improve your credit score.
3. Preserve the length of your credit history. (15%). Don’t close unused accounts, because the length of your credit history is important. An insufficient credit history can have a negative effect on your score. Also, don’t open up new accounts rapidly, as this decreases the average age of your credit accounts, and it is considered risky behavior in most credit scoring models. It’s good to keep and occasionally use old credit cards to maintain a good score.
4. Avoid applying for new credit, if you are considering buying a home in the next six months. Every time someone makes an inquiry into your credit, as when you open a new account, it negatively affects your score. (It doesn’t affect it if you look into your own credit.) You should always read the fine print in ‘special’ credit offers, and if you have any question about the legitimacy, don’t accept it. These solicitations are treated as ‘soft’ inquiries, which don’t affect your score; but when you accept the offer, it is treated as a ‘hard’ inquiry that is factored into the score.
Definitely, don’t apply for a card you don’t think you are likely to get.
*When you are applying for a loan, the credit scoring companies generally allow multiple inquiries in a 14-day period. Inquiries from employers are not counted. Most of the time, for most people, one credit inquiry will result in less than five points being deducted from the score.
5. Manage the number and types of accounts you have. (10%) Someone who has a lot of credit accounts could possibly be considered a higher risk than someone who has only some credit card debt. The trick is to manage it wisely. Too many credit accounts can have a negative affect on your score. The ideal number of credit cards is usually considered to be 3 to 5. If you have an unreasonable amount of credit cards, you may want to consider closing some… but do it wisely. You could affect the ratio between credit limit and available credit previously mentioned that will reduce your score. You could also negatively affect the length of credit by closing older accounts.
Generally, a mix of credit cards, retail accounts, installment loans and mortgage loans results in a better score, but all are not necessary. The lack of a mortgage, for instance, won’t negatively affect your score, but it will probably not be as high as it could be with one. You should not go out and open accounts that you don’t have in an effort to increase the types of accounts.
Good Credit Can Be Six Months Away
If you have less than desirable credit scores, don’t lose hope, there are definite things you can do to enhance your credit scores. You can learn how to improve your credit score and keep it in good shape. If you start practicing these good credit management tips now, you’ll most likely be in much better shape in 6 months, which is really not a long time.
If you need extra help for Credit Repair, contact us for a referral to a reputable credit repair specialist. We have helped clients increase their purchase ability within a few months with the help of a credit repair specialist. They know exactly what to do, where it may take the rest of us months of research and work to accomplish the same results.
More on Credit Score:
How To Improve Your Credit Score
Blemished credit can be costly, low credit scores mean higher interest rates. What can you do?
1. Check your own credit score. Mistakes are made, and finding them can save you. Everyone has the right by law to challenge mistakes on their credit report. Keeping track of your credit score is important to catch mistakes.
2. Pay past due accounts. Past due accounts can include those that are 1 day late. Past due accounts do not include judgements and collection accounts. Consult a credit professional about judgements and collection accounts. Depending on the age of the collection, sometimes paying them will bring them to the front of the credit report and the effect will be to lower your score.
3. Get rid of late payments. Have them removed by phoning your creditor and requesting late payments be removed. You must be persistent and work your way up the ladder to someone who can help you. Always get a letter that documents: Name/address/account number, specific late payment to be removed, on company letterhead/signed by employee.
4. Get your credit card balances down, try getting credit limits increased. Every 6 months request an increase to your credit limit. Have the creditor base the increase on your credit history. However, if the creditor must pull credit, don’t, it will lower your credit score.
5. Start or keep making payments on time.
6. Use old accounts periodically, charge a small amount and pay it off immediately. Don’t reply to pre-approved offers. Don’t consolidate.
7. Consider using the services of a professional credit counselor if you need extra help improving your credit score. We know just the person to help!
If you wonder if it’s worth the trouble, think about this: Increasing your credit score by 10 points will net interest savings of $100,000 over 30 years (on a $500,000 mortgage loan.)
It’s worth the trouble! Check out this table showing the impact of interest rates on your monthly payment
🏡 We hope this article about the understanding your credit score will be helpful in your real estate journey. Your path to a smooth and informed real estate experience starts here. Let’s make your property dreams a reality! 🌟
Chris & Karen Highland
eXp Realty – 301-301-5119
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