Credit Scores and Credit for Beginners
As a mortgage lender I have the unique opportunity of getting to know a variety of people. They, just like you, have a story to tell. In the world of finance, that story often begins and ends with a number. That one number that can make all the difference in whether you’re able to buy your dream home.
You might be wondering just where does this mythical score come from. In mortgage lending, we typically pull your credit report from all three credit bureaus (Equifax, Experian, and TransUnion). The high and low scores are thrown out and we use the middle score as YOUR credit score. If for some reason you only have two scores, we use the lower of the two scores.
Interesting fact*: the average credit score in the US is 695. The average credit score of a millennial (someone aged 19 to 34) is 625.
But, there is something you should know about credit scores. There is more than just one. There are more than three. In fact, there are many, many types of scores and variations on each score. Credit scores, sometimes referred to as your FICOTM score or BeaconTM score --- think of these as proprietary names like Xerox is to a copier or iPad is to a tablet, can be tailored to the type of loan you are trying to obtain. There are scores that indicate whether you are more likely to pay your mortgage loan back and scores that indicate whether you are more likely to pay your car loan back. You’ve probably guessed that these scores are not the same and that a mortgage lender is going to pull a score tailored to knowing if you are likely to pay back a mortgage loan and a person considering giving you a loan a loan on a bright, shiny new car is going to pull a credit score that tells them if you are likely to pay back a car loan.
According to Gerri Detweiler of Nav, “Whether you pay bills on time is the single most important factor that makes up your personal credit scores.” (you can find her on Twitter @gerridetweiler or @navSMB and online at www.nav.com) Gerri goes on to say that how late you are matters too. On your personal credit a few days late is not likely to impact your score, but going 30, 60, 90 or 120+ days late will have an impact. The later you are = the greater the negative impact to your credit score. In addition, your credit score is going to take into account how often you were late and were those late payments recent. So one payment made 31 days late two years ago is not the same thing as 6 payments made 62 days late last month.
Another factor that affects your credit score are the types of accounts that you have. Do you have installment accounts – the kind of accounts where you borrow a set amount of money and pay it back in equal monthly payments? An example of an installment account would be a car loan (and, yes, a mortgage loan is an installment loan). Do you have revolving accounts? These are accounts where you have a maximum limit that you borrower, but you may not borrower it all at the same time and, as you pay it back, you can borrower it over and over again. Examples of revolving accounts would be credit cards and department store charge cards. There are often minimum payments associated with revolving accounts or you can pay them in full each month.
With revolving debt, you also need to keep an eye on your credit utilization. This is a fancy term for how much of what you are allowed to borrower have your borrowed. HINT: the lower the percentage the better! If your credit cards have a maximum limit of $10,000 and you have used $9,000 then you are at 90% credit utilization. This is NOT good. If you have used only $1,000, you have 10% utilization and this will be much better for your credit score. While there is no magic number for credit utilization percentage (getting the formula for credit scores is akin to getting the secret formula for Coke), myFICO.com gives examples showing 50% so I definitely would not go over that percentage and I would stay as low as I could. Like kids playing a game of limbo, “how low can you go?” would be my motto on credit utilization.
In addition, the number of accounts you have, the length of time you have had those accounts, and the number of inquiries – how many times people have taken a peek at your credit report – have an effect on your credit score.
Ungenita Prevost from PoshonPennies reminds us that we should be wary of “Sexually Transmitted Debt”. (you can reach Ungenita on Twitter @UngenitaPrevost or @PoshOnPennies or online www.poshonpennies.com ) If the term alone isn’t enough to scare you, let me explain. Someone else’s debt can have an impact on YOUR credit score. Usually this someone is a significant other, hence the aforementioned coined term, but it could also be someone for which you have co-signed a loan. There is a lot more on this topic – think about your business, your business partners, and your ex-business partners; stay tuned, we will come back to this in another blog post.
No one wants to lose the home of their dreams over their credit score; or have that home cost them more money --- everything from interest rates to insurance premiums to mortgage insurance can cost more if you have a lower credit score. So, I will leave you with these top tips:
· Pay your bills on time
· Have a variety of types of credit
· Have a long history of credit (24 months is very advantageous, but you need at least 12 months)
· Keep your credit utilization percentage low
· Payoff any collections or judgments
As I mentioned before, there is more to cover on credit and we will do just that in another blog post. Join us there or, if you have a burning question, you can reach me on Twitter (@TheGlickTeam), email EGlick@StarkeyMtg.com, at the office at 912.721.9408, and my website at www.TheGlickTeam.com .
As always, if you liked this article please like, share, or comment…….or all of these things; they are greatly appreciated.
Eric Glick, Senior Loan Officer and Office Manager
NMLSR#544398, GA LIC#32997
Georgia Residential Mortgage Licensee
6600 Abercorn St #105, Savannah, GA 31405 NMLSR#544398, GA Lic#32997
EQUAL HOUSING LENDER
WR Starkey Mortgage, LLP, 6101 W. Plano Parkway, Plano, TX 75093 (NMLS#2146) 1-866-599-5510 Copyright©2016 All Rights Reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all dollar amounts. Other restrictions and limitations may apply. WR Starkey Mortgage, LLP is required to disclose the following information: Georgia Residential Mortgage Lender Licensee No. 19715, Florida Mortgage Lender License #MLD1043, North Carolina Mortgage Lender License No L-112550, South Carolina Mortgage Lender License No. 2146, NMLS ID# 2146 (www.nmlsconsumeraccess.org)