Your life consists of many numbers that paint a picture of your overall wellness, from cholesterol to blood sugar to body mass. But your credit score is the number that determines your financial wellness. It’s also the number your loan officer looks at to help find the right mortgage loan for you. What does it all mean? How is it calculated?
First, let’s start with your credit report. This is as an explanation of your overall credit history, from how much you owe to when and how much you pay each month. It shows the facts that your creditors report to the major agencies about your credit habits. Nothing more. Nothing less.
If you’ve ever looked at a credit report, you know it can be a little confusing to understand. In order to help creditors, the Fair Isaac Corporation (FICO) translates all of the stuff in your credit history into a number that helps potential lenders determine your creditworthiness.
The higher your score, the better your chances are of getting good interest rates and the kind of loan you want. The lower your score, the fewer the options.
The good news is that the components of your credit score are not top secret, we’re going to break it down for you.
Each factor has a weight (or percentage) that impacts your score.
These percentages can change slightly if one of the factors is absent from your profile. For example, if you’re a relatively new borrower, you may not have a lengthy credit history. Instead of getting 0% for that item, FICO adjusts the other factors and redistributes the percentages accordingly. Some factors do carry more weight than others though, and that won’t change.
Like your fingerprint, your credit score is unique to you and your credit history. And your credit score may change frequently during your lifetime.
As your financial habits change, your number is impacted. Pay off a credit card? Your number changes. Get a new loan? Your number changes. Increase a credit line? Your number changes. That’s why it’s so important that once you submit your mortgage loan application that you talk to your loan officer before making any changes that may impact your credit score and possibly your loan approval. Something as seemingly harmless as seeing if you qualify for a furniture store credit card could have an impact.
Keeping your credit score in check is like a game of chess. Each move you make has to be strategic and you need to think about what could happen later. Paying off and closing one credit card and then getting another may change your score. Or asking for a deferral on a student loan could alter payment calculations that your loan officer uses.
If you’re like most people, you have a credit card or two. But what happens when you start to overuse them and max them out? You start to paint a picture of how you use credit. Your lender may see the usage of credit as an indicator of potential risk. Try to limit the number of credit cards you use, keep the balances low and when possible, pay them off each month.
Your payment history shows how you repay your debt. Your loan officer wants to see that you always make your payments on time. To increase your success, sign up for automatic payments for your debts so that you don’t accidentally miss a payment. We all make mistakes; it happens. Sadly, your FICO score doesn’t take into consideration those moments when life catches up with you. Your number will be impacted negatively by missed payments or late payments.
Bankruptcy, collections accounts, and judgments show up on your credit report, and those items have a bearing on your credit score. Monitor your credit history to make sure there are no incorrect negative items on your report. It could happen. Errors can occur if you have the same name as someone who applies for or abuses credit. Or, your identity could have been stolen without your knowledge. These mistakes could take a lot of effort to clear up when it’s mortgage application time.
When I opened a department store credit card account, I didn’t know what I was going to do with it, but I was excited to have a credit card account with that store. I had that account for over a decade and never used it, so I decided to close it because I thought it would help my credit score by getting rid of an account I wasn’t using. Unfortunately, my credit score went down as a result, not the other way around. I asked my bank why that happened and they told me that having longevity with a credit account is actually a good thing and helps credit scores.
It’s good to diversify when it comes to credit. A nice mix of loans and credit (but a reasonable, responsible mix) show lenders you know how to be smart with where you spend your money and that you are on top of keeping it balanced. If you notice you have several credit cards and very little of anything else, you may want to put a hold on applying for any more credit cards. We’re not suggesting that you open more lines of credit, or acquire more debt, just keep this in mind when looking at your credit report.
A credit inquiry (or pull) happens whenever someone checks your credit after you apply for credit. Hard inquiries result when you apply for a credit card, car loan, personal loan, etc. and can lower your credit score a few points. Try to limit the number of inquiries because an increase in the number of inquiries can look irresponsible to a lender, and potentially lower your score.
You can take steps to improve your credit score. It will take some time and effort, but the rewards are well worth it.
We’re more than happy to sit down with you and look at your credit report and score. We’d love to help you learn ways to improve your chances of getting the kind of loan and interest rate that works for you and your budget. Contact an Atlantic Bay mortgage banker to start the conversation.