Your credit score will determine what your mortgage rate will be, can determine what your home owner's insurance rate will be and can affect the purchase of your next car.
A lower credit score and higher car payment may be the difference between qualifying for your new home and not quite being there.
How your score is calculated may seem mysterious, but it's essential to know your number and how to make it work for you.
Q: What Is a Credit Score?
A:You Credit score reflects your credit worthiness and therefore is a good indicator on how likely you are to pay back your loan. For lending we use Fair Isaac Corporation (better known as FICO) this has three major reporters Equifax, Experian and Trans Union.
The FICO scale ranges from a low 300 to a high 850. The higher your score, the more likely you will qualify for the lowest interest rates. One important thing we have notices is that scores can vary from report to report. Some past transgressions may only report on one score provider. When evaluating mortgages we look at the middle score to determine our rate and discount points needed.
Q: How Is Your Score Calculated?
A:Your score reflects how well you've managed your debt. Late payments remain on your record for seven years. (For some forms of bankruptcy, it's ten years.) Some Judgments can last for up to 14 years and Federal Tax Liens never go away. It's best to stay on top of your score and the factors that make up your score.
What goes into your FICO score?
The facts: The bureaus factor in when you last paid an account late, how often you pay late, and by how many days. It is one of the major components in determining your new mortgage rate.
So what factors go into determining your score?
Total Debt (30 percent)
The facts: In general, higher debt loads work against you.
The strategy: Lenders look at your "usage ratio" -- how much debt you owe on your credit cards compared with the total amount you could borrow. To keep your ratio low, don't max out your cards, and don't cancel cards you don't use.
Basically take all the used credit lines and divide by the available credit lines - ideally this will be below 50%. It's important to know that credit reports reflect a snap shot in time. So your score can vary depending on the balances at the time of the credit pull and your credit line reporting to the agencies. This is especially true for professionals that use personal cards to travel on business.
The lower the ratio of used credit to available credit is the better your score. For those who travel often or charge expense for their company on a card it is a good idea to have other credit cards open to keep the ratio in check.
Duration (15 percent)
The facts: The longer you've had an account, the better. A late payment on a two-year-old account will hurt your score more than if you'd had the card for two decades.
The strategy: Many of us have had credit card companies closing our accounts or changing the terms of our accounts as we move closer to the beginning of next year and the changes that will take place in the credit card industry. It is important to monitor the status of your cards and the credit lines of cards that you may have had for year. It is best that you use cards to keep them active. If you have a card canceled you may need to apply for a new card to keep your debt ratio in balance (see "Total Debt" above).
New credit (10 percent)
The facts:Part of your FICO score comes from credit inquires.
The strategy:When you apply for credit this is called an inquiry. The more inquires you have on your credit report during the year the higher the risk you are seen to be. The thought is "change is taking place" and with change comes risk.
The good news is that the three reporting agencies do understand the importance of shopping for major purchases such as cars and home loans. Inquires made at different companies during a 45-day period all count as one inquiry for major purchase items. This is called "de-duping".
While the FICO companies do "de-dupe" major purchases, credit card, department store cards and finance company inquires all count as one inquiry for each card or credit line applied for - if you are shopping for a new home be careful when you think about saving that extra 10% by opening that new store card. It may make a difference.
Types of Credit (10 percent)
The facts: FICO looks at the number and "quality" of each type of account.
The strategy: Credit cards issues from banks are seen as more difficult to get than department store cards or finance company lines of credit. Loans from finance companies may actually hurt your score as they are seen as a high cost type of credit. This is important to know especially since most zero down and "no payments for 12-months" deals are facilitated by finance companies. You need to be careful about how your finance your new acquisitions.
Speaking of aquisitions - never buy furnature, new applicances or a new car when you are beginning to shop for a new home. Simply delay these purchases until you have closed on your new home. If you are a first time home buyer the fact you have a mortage loan may actually boost your credit score. This may lead to a lower cost and price for all your new purchases.
Get the Real Free Credit Report
Check all three of your credit reports at annualcreditreport.com, the only site authorized by federal law.
Check for Mistakes
We have helped many of our client's improve their score by using satisfaction information they have provided to get their score up and allowed them to qualify for a loan. A "rapid re-score." This will ensure that the lender sees you at your best, but it costs about $30 to $90 per account.
Better Score, Cheaper House (From Reader's Digest Story this Month)
If a family put a 3.5% down payment on a $172,900 four-bedroom house in Greenville, South Carolina, they would take out a loan for $166,850. Here's what their true bottom line would look like.
Score Rate Payment Cost
760+ 4.981% $893.75 $326,900
700-759 5.203 $916.50 $335,090
680-699 5.380 $934.83 $341,689
660-679 5.594 $957.22 $349,749
640-659 6.024 $1,002.93 $366,205
620-639 6.570 $1,062.30 $387,578
Less than 620: It will be tough to get a loan at all.
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