First question any one buying a home or getting a home loan wants to know is what is the rate? Reality is that rate for you may not be the same rate for someone else simply because of credit. That’s not to say that there are not other factors in play. But credit score has a huge impact when qualifying for a home loan. Someone with a 700 score is going to get a much better rate than someone with a 580 score. And even someone that makes 10k a month and even a nice down payment, but with a 500 score is going to be looking at high double digit interest rates.
Here are the five categories in regards to your credit that have the greatest impact to what your scores are.
• Past Payment Performance (35%): Do you pay your bills on time? The more recent the late payments, the lower you credit score. In fact, a 30 day late payment today hurts more than a bankruptcy five years ago. After a few months go buy those 30 days and 60 days will hurt your scores even less. But usually that may take as long as 6 months to a year depending on how often you have done that. Plain and simple budget and do not get your self in a situation where you cannot pay them on time. Do not just live within your means but even below so there is always that extra cushion for those times when the car breaks down for example.
• Credit Utilization (30%): Have you maxed out your credit lines? Low balances on a few cards are better than high balances on one or two cards. Keeping balances below 30% of the credit line increases your chance for a higher score. Once you pass that 50% credit limit you scores are going to drop. Just because you have a credit card limit up to 2k or 5k. Does mean you are suppose to use it. Your credit card was meant for incidentals and emergencies stop buying into the hype every time you watch TV. A kiss does begin with the letter “K” but it does not mean you have to spend 5k to get one.
• Credit History (15%): The longer your accounts have been open, the better, so surfing for a new lower rate on a credit card and transferring balances can hurt your score. Just keep in mind that most lenders in trying to get you a home loan are looking to see credit lines established for at least a year. This is sometimes an issue for those that filed Bankruptcy because they have no established credit after a BK. As soon as your Bk is discharged get yourself a secured card that reports to the agencies so you can start to get some scores.
• Types of Credit In Use (10%): Getting a loan at a finance company rather than a bank or credit union lowers your score. Even if you have collection accounts believe it or not they will help you maintain a certain score. They may not give you the best but sometimes your scores can actually drop if you pay them all off. I know the commercial says “Problem Solver Loan” and get your money in just one day. But those so called “Problem” solver loans are the problem. Most of them in that tiny fine print disclose that the APR is well over 100%. So not only are you paying nose bleed interest rates. But they actually keep you from getting a better score, than you could of gotten from lets say your credit union. But key to not getting or having to get in that situation is just watch your spending and get a budget.
• Inquiries (10%): Applying for new credit lowers your score, but multiple inquiries from the same type of creditor – like mortgage companies or car dealers – within 14 days count as only one inquiry, and many times in getting a mortgage the point drop even within a 45 day period if moderately done will not affect you. Promotional or administrative inquiries do not count against the score – only those times that you applied for credit count. In other words just because you are Target or where ever and they offer you 10 % off your purchase. You do not need it, because you keep applying everywhere will cost you so much more in the long run, when your scores drop.
It is so much easier for your scores to literally drop like a rock than it is to get them to climb up in numbers. So watch your scores the better your score the better your rates and programs that you can qualify for.
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