Stop and Think before You plan to Change Your Credit Scores!!!!!
I've included this on my blog for my buyers to read.
Even though this lender is outside of our area, his advice on credit scores is well worth your reading. I can think of one deal that was lost last year because the buyers paid off their credit cards then closed the accounts.
All while their lender was on vacation and having fun in the sun. She hadn't hadn't given them any guidance before she left town. The deal was dead long before closing because they had wiped out their credit. Sad but true story.
Credit is one of THE MOST IMPORTANT ISSUES IN getting a loan today.
Time and time again, I'm called by a client who says "I PAY MY BILLS ON TIME, BUT MY PEOPLE SAY MY CREDIT STINKS....
Maybe I'll just pay off my credit cards today.....
No, No, No, No Nooooooooooooo!!!!!!"
Truthfully, there is more to a credit score than just making your payments on time or paying off your credit. In fact paying off all your credit today could be a bad move. Needless to say, I've broken this down so that the complexities of mortgage credit scoring can be understood by the consumer. I reference this a lot when consulting clients. With this information you can self-analyze your situation to make sure that you monitor your scores or raise your scores to where you want or need them. In other words, this serves as a roadmap to building a good credit report.
Here are all 5 factors in the order of importance:
1) Payment History has a 35% impact. Paying debt on time and in full has a positive impact, and late payments, judgments and charge-offs have a negative impact.
2) Outstanding Credit Balances have a 30% impact. Debt ratio of outstanding balance to available credit is important. Keeping that below 50% is wise and below 30% even wiser. It is never a good idea to close an account; the debt ratio will go up and the number of seasoned lines will decrease. Pay outstanding debt down as close to zero as possible and evenly redistribute the remaining balance among the open lines. The increased interest incurred by moving a balance from a 0% card to a 23% card will be minimal relative to what the increased mortgage debt might be with a low credit score. Hitting the maximums of available credit can be very negative. It may be worth calling and asking the credit company to increase your available credit to lower the debt ratio, provided they can do so without a hard credit inquiry.
3) Credit History has a 15% impact. The length of time a particular credit line has been opened is important. A seasoned borrower is stronger.
4) Type of Credit has a 10% impact. A mix of auto loans, credit cards and mortgages is positive, rather than a concentration in credit cards only.
5) Inquiries have a 10% impact. Hard inquiries for credit will negatively impact the score. Auto and mortgage inquiries receive special treatment and 20 inquiries can be made in a 14-day period for auto or mortgage and will be treated as only 1 inquiry. The maximum number of inquiries that will reduce the score is 10. Any inquiries beyond that [11+] in a six -month period will have no further impact on the borrower. Each hard inquiry can cost 2-50 points on a credit score.
Make sense? It does to me. File this away in your back pocket. Every time you want to save 10% on the flashing blue light special for signing up for a new card....well...you may be paying a lot more than that with all of your other credit if your scores drop. Know your facts, call me if you want to talk further on how this may affect you.
Larry Bettag - Regional Vice President, Midwest Region
Illinois FHA Specialist
630-417-7172
An Illinois Residential Mortgage Licensee
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