What is the importance of the credit scores, why should we even care about this?
A higher credit score provides more options available on various loan programs, better rates, and a smaller down payment may be required. A 1% difference in the rate of a $200,000 30 year fixed loan will cost an extra $60,840. Credit scores also affect your car insurance rate, your home owners insurance rate, even the ability to get a cell phone. Some employers also pull credit, so it may affect what job opportunities are available.
What factors affect our credit score?
Payment History. Has a 35% impact. Paying on time has the greatest impact. Late payments and charge offs are negative. Missing a high payment hurts more than missing a low payment. Late payments in the last 2 years have more of an impact than old late payments.
Outstanding Credit Balances. Has 30% impact. Measures the ratios between the outstanding balance and the available credit. Keep balances as close to zero as possible, 30% is one level, 50% is another and 75% of utilization hurts your score almost as much as a late. Better to have 3 $1000 card balances, than 1 $3000. To raise score, either spread out your balances, or increase available balance, but don’t charge on that new available balance.
Credit History. Has a 15% impact. Measures the length of time a particular credit line was opened. The longer the better. Don’t cancel cards that have a long history. Don’t open new accounts.
Type of credit. Has a 10% impact. Best to have a mix of auto loans, credit cards and mortgages, rather than just credit cards alone.
Inquiries. Has a 10% impact. Each credit pull can cost from 10 to 25 points on a credit score. Once there has been 10 pulls, no more pulls will lower the score more. If you pull a credit report on yourself there is no hit, and all pulls done by mortgage companies in a 14 period counts as 1 pull.
How about mistakes on credit reports, is that an issue?
79% of the credit reports contain a mistake of some kind. 25% of the credit reports contain errors serious enough to result in the denial of credit. 54% of the credit reports contained long outdated, or entries that belonged to a stranger. 30% of the reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open.
The 4 steps simple process to get errors off of your credit report.
- Make a copy of the report and circle the items you are questioning. Keep your original copy for your own records.
- Prepare a letter to the CRA (credit reporting agency) that provided you with the report in question, and request to have the erroneous items removed. If you have proof of payment for an item in question, include a copy of that documentation.
- Prepare a letter to the creditor reporting the problem, especially if you feel you are a victim of fraud or identity theft. Inform the creditor that you are disputing an error reported to the CRA, state why the claim is inaccurate, and include any relevant documentation to prove your point.
- Send your correspondence via certified mail.
A couple of sample secrets on how to raise a credit score.
- Distribute debt from revolving credit. Mr. Jones, has a credit score of 664. He has five credit cards, but his Visa account is almost maxed out. His other four credit cards have relatively low balances. Mr. Jones moves the part of the debt from the Visa account to the other major credit card accounts, thus distributing the debt more evenly over five cards. This changes the ratio of debt to available credit (which has a 30% impact on the overall credit score), and Mr. Jones successfully raises his credit score by 20 points with very little effort.
- Transfer outstanding balances to new accounts. Our borrower, Mr. Smith, has only two credit cards, but both are pushing the limit of available credit. Mr. Smith opens two new credit card accounts, each with a credit limit of $5,000. He transfers part of his existing balances to the new accounts. While he has acquired two new cards that have no established history, the greater impact is the change in the ratio of debt to available credit.
Some Do’s and Don’ts during the loan process.
When you fill out a credit application, we run a credit report for the underwriter. Each lender and each loan program has different guidelines they must follow. You should not do anything that will have an adverse affect on your credit score while you are in the loan process. We know it’s tempting…if you are moving into a new home, you might be thinking about purchasing new appliances or furniture, but this is really not the right time to go shopping with your credit cards. You’ll want to remain in a stable position until the loan closes and give us the opportunity to help you lock in the best interest rate we can possibly get for you.
Don’t apply for new credit of any kind- if you receive invitations to apply for new lines of credit, don’t respond. If you do, that company will pull your credit report and this will have an adverse effect on your credit score. Likewise, don’t establish new lines of credit for furniture, appliances, computers, etc.
Don’t pay off collections or charge-offs- once your loan application has been submitted, don’t pay off collections unless the lender specifically asks you to in order to secure the loan. The lender is only looking at the last two years of activity.
Don’t close credit card accounts – if you close a credit card account, it can affect your ratio of debt to unavailable credit which has a 30% impact on your credit score. If you really want to close an account, do it after you close your mortgage loan.
Don’t max out or over charge existing credit cards – running up your credit cards is the fastest way to bring your credit score down, and it could drop up to 100 points overnight. Once you are engaged in the loan process, try to keep your credit cards below 30% of the available credit limit.
Don’t consolidate debt to one or two cards – Once again, we don’t want you to change your ratio of debt to available credit. Likewise, you want to keep beneficial credit history on the books.
Don’t raise red flags to the underwriter – don’t co-sign on another person’s loan, or change your name and address. The less activity that occurs while your loan is in process, the better it is for you.
Do stay current on existing accounts – one 30-day late payment can cost anywhere from 30 to 75 points on your credit score.
Do continue to use your credit as you normally would – red flags are easily raised within the scoring system.
Do call your loan consultant – if you receive notification from a collection agency or creditor that could potentially have an adverse affect on your credit score.