It is amazing that credit scores have been the basis of mortgage lending for over ten years and if you ask anyone how the formulas are derived, you would be met with a blank stare. Even the credit bureaus have a hard time explaining all of the factors that go into your credit score. We all know that good credit is important and yet, many are finding that when it comes to interest rates, you need more than good credit. All mortgage loans now have credit score requirements that if not met, will mean a higher interest rate on your loan. Most Conventional loans, for example, require a 740 or above in order to achieve the best rates. This means that unless you actively manage your credit report, you may find yourself being quoted a higher interest rate than you had anticipated. According to Fair, Isaac and Company, the group that designed the credit scoring model (FICO), a credit score is broke down with the following:
- 35%-payment history.
- 30%-amounts owed.
- 15%-length of credit history.
- 10%-types of credit.
- 10%-new credit
That means that if you have maintained a good payment history, you should have a very solid foundation for your score, however, it is the remaining factors that can determine how high your score will climb.
Here are a few tips, other than making your payments on time, that can help you manage your credit scores:
1. Watch your credit card balances. As crazy as it sounds, it is actually better to have two credit cards with 50% of the balance owing that one large balance. This little trick, if followed, will help you to maximize your scores.
2. Avoid credit inquiries. That's right, don't let your credit be pulled unless you have made a commitment to apply for something. To many credit inquires chop away at your score and this can be very frustrating. An inquiry can affect your score anywhere from 2 to 50 points depending upon the strength of your credit score, so this be very, very careful.
3. Establish "smart" credit. If you don't have any credit, one of the best ways to establish credit is with a share secured loan. The collateral for this type of loan is a savings account or certificate of deposit. By borrowing against your own savings, you can establish credit by paying back small monthly payments. This type of a loan also reports as "installment" debt which will carry a higher point value than "revolving" credit card debt.
4. Work with an Expert. Any experienced Mortgage Loan Officer should have the ability to run "What-if" scenarios on your credit report for a minimal cost that can help you to determine what needs to be done to improve your scores.
Now is the time to prepare for an upcoming mortgage purchase or refinance by understanding what you can do to get the best interest rate possible. For more information, contact me at 801-409-5219 or email me at awykstra@bankofutah.com.
Comments (0)Subscribe to CommentsComment