Just a reminder about how the credit scoring works. In yesterday's world, just a couple of years ago, a 680 was guaranteed to get you the best rates out there on the conforming side. Now, with all of the Fannie Mae and Freddie Mac changes, that bar has been raised to 740 unless you want to go FHA, VA, or Rural Housing. Even then, those scores, once allowed below 600, now require for Rural Housing a minimum 620 score , and VA and FHA(with Wells) requires at least a 600 score.
It is imperative that you check your credit once a year since a vast majority of credit reports contain errors. The agencies that report your credit are Equifax, Experian, and TransUnion. You can obtain your credit report once a year for free on www.annualcreditreport.com.
However, if you would like your score included also, you can pay a small fee for that so you can at least see where you stand score wise.
There are five componets that make up your credit score and the distribution is as such:
35% Timely Payments
30% How much you owe compared with available credit
15% How long a history you have had
10% Mix of credit
10% "new credit"
I will go through each one of them:
TIMELY PAYMENTS:
Self-explanatory. Don't miss a payment on your credit card or other account. One 30 day late payment can shave as much as 100 points off your score. If for some reason it was a bill oversight, you could always correct it the following month, get it current, and most of those points willbe recovered. The key: If you travel quite a bit or are an extremely busy person, get online with one of your banks(Wells Fargo) and get auto bill pay. Although it is time consuming at first, you can enter all of your creditors in there at one time, put account numbers in, figure the due date, and simply set up reminders to pay those bills on those given dates. On-line auto bill pay is one of the greatest inventions out there.
HOW MUCH YOU OWE COMPARED WITH AVAILABLE CREDIT
: This is the one that gets people more than anything because with consumer spending down so much and usage of credit cards declining rapidly while people go to cash, there is a tendency to close those accounts that you pay down to zero. DON'T DO IT. The reason: Let's say you had a Capital One VISA with a $5000 limit and a $1000 balance. Your proportion of balance to credit limit is 20%. Once you pay down that balance to $0 and then have that closed account, you now have a $0 credit limit and yes, a $0 balance, but the proportion owing to limits is much higher now. I know it is a screwy thing, but the best advice is to pay off(or pay down) those balances, and ideally keep the balances owing to around 10% of what is available out there.
LENGTH OF HISTORY:
This is also where it gets a little hairy, because so many of us want to do balance transfers from a higher interest account to a 0% interest account or to open an account that may offer rebates or frequent flier miles. Here is the problem: when doing that, we all of a sudden have a new credit card account opened(10% of your score), and worse yet, that new credit card may have the transferred balance and the old credit card transferred may have the zero balance, but because the account with the balance is NEWER, it will affect your score more negatively initially because of the fact that the account has not seasoned yet. MORAL OF THE STORY: Unless your credit score is already in the high 700 range, transferring balances if you are in the 720-740 range could bring your score down a little bit, thus affecting your interest rate on a conventional loan if it is a refinance. In addition, to establish more credit to try to give yourself some credit depth, keep in mind that opening a new account may hurt your score intitially but over a period of a couple of months, it should begin to boost your score, as long as you keep the balance low.
LAST TWO: TYPE OF ACCOUNTS AND NEW ACCCOUNTS:
Type of accounts makes up 10% of your score.That refers to the mix of accounts you have: gas cards, mortgages, credit cards, auto loans, etc. I see many clients(I have been guilty) tend to take advantage of one year no interest type of accounts at furniture places(although what furniture places are around anymore?). However, most of those type of accounts are finance company accounts, and those accounts are looked upon negatively since finance companies are considered high risk companies. They will bring down your score.
And, now for the last one and most misunderstood, NEW ACCOUNTS. This refers to inquiries. People get so freaked out that, if they applied for a mortgage at Bank of America, for example, and the service was not up to par, and they want to possibly apply with me at Wells Fargo, they feel an extra inquiry will bring down their score.
Here is the skinny on inquiries
: If one wants to shop around for the best auto loan or mortgage loan out there, Fair Isaac(who determines the FICO score) recognizes that and the calculation recognizes those various inquiries for auto and mortgage loans( in a 45 day period) as only one inquiry.
SUMMARY:
While in the process of shopping for a mortgage, shy away from the balance transfers since it could hinder your
score.
Don't open a new account just to get rebate points while applying for a mortgage
Don't fall temptation to the promos for one year of no interest while applying for a mortgage
Don't fret about having several different inquiries with different mortgage companies because the calculation is
set up to count these inquiries as only "one" inquiry.
Get set up on auto pay so you don't fall late on your payments.
Hope this all helps.
Thank you again for your business,
Sincerely,
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