Credit 101 - Back to Basics

This is a re-blog from Amy Cavender, Simplified Mortgage Solutions, with her permission. It's good information!

I had an agent forward me an article that was written in Better Homes and Gardens about credit scores.  My company sponsors a credit class presented by Jim Kaiser with Advantage Credit.  I forwarded him the article because I felt consumers would not even consider a mortgage if their score was below 780.  That's just not the case.  Of course, we do have stricter guidelines compared to a year ago.  VA and FHA financing allow scores a little bit lower because they do not have risk-based pricing.  Therefore, rate is not determined on score.

Advantage Credit wrote a nice piece re: fico scores. 

CREDIT 101 - BACK TO BASICS

Let's get back to basics.  In this time of financial turmoil, getting and keeping a good credit rating may seem like an insurmountable task.  There are basic steps we can take to ensure that the little 3 digit number that defines us in the credit world is a good number.  And anymore, a good number means 720 or even 740 and above. 

• Don't open new accounts unless you have to. Any time you open a new account of any kind it will most likely have somewhat of a negative affect on your credit score.  It may not be much depending on what the rest of your credit looks like, but in today's world even a few points could mean the difference between a good interest rate and one that could cost you hundreds of dollars each month on your mortgage payment.  New accounts equal a new inquiry, so be leery of opening any new accounts.
• Don't close old accounts.  When you close an account you're closing the history.  That JC Penny card that you've had forever but never use is helping your credit score.  Today though, if you don't use an account for a while chances are the creditor is going to close it due to lack of activity.  So go buy a pair of socks and then pay it off when the bill comes, but don't close it and remember to use it occasionally.  This is going to be even more important with the new FICO 08 scoring model being released this year.  If you have more closed accounts than open, your score could take a pretty big hit. 
• Keep your revolving balances low.  A lot of people think that if they keep their credit card balances below 50% of the high credit they will be ok.  50% is a target, but it is not THE  target.  Optimally you should have more than 3 credit cards with balances below 30% of the high credit.  Once the new FICO 08 scoring model is launched you will want those balances preferably below 10% of the high credit for the best score possibility.
• Pay your bills on time.  One 30 day late on one account - even a little store credit card - could potentially drop your score 100 points or more.  And don't be fooled into thinking a mortgage or auto late carries more weight than a credit card late.  A late is a late no matter what kind of account it's attached to.
• Be careful if you pay off old debts such as old collections or charge offs.  When you pay these off you are going to bring the reporting date current which makes it look like a recent derogatory even if it is 4 or 5 years old and this will hurt your credit score.  I am not suggesting you should not pay your debts, but if you are applying for a mortgage you should pay them at closing and they will not be updated on your credit report before closing and lower your scores.  Collections and charge offs will fall off of your credit report 7 years from the date it originally was charged off or put into a collection status, no matter how many times the account has been sold and regardless of whether it is paid or not.
• Avoid co-signing loans.  It is easy to want to help a friend or relative who may have less then perfect credit by co-signing for that car they want.  But be warned if they default on that loan or incur a late payment it will show up on your credit report too and could devastate your credit score.
• Have a good mix of credit.  If you have only revolving credit cards consider getting an installment loan.   Examples would be an auto loan or a mortgage.  If you have good credit most banks will even consider giving you a small unsecured installment loan.  This is another factor that is going to weigh more with the new scoring model.  They want to see a good mix of credit and not just all revolving debt.
• Check your credit report annually.  Once a year you can obtain a free copy of your credit report from all three bureaus.  The only place you can get this free report is through www.annualcreditreport.com.  It will give you an option to purchase your score but understand it is a personal score and not a mortgage or auto score.  Every industry has their own scoring models and a personal score will almost always be higher then any other industry scores.  In order to monitor your report year round it is wise to order one bureau in January then wait 3 or 4 months and order the next bureau and 3 months later order the last bureau.  If you find errors on your credit reports you can then dispute them on line through the annualcreditreport website.  It is very important to go over your reports in detail to make sure that all the correct information is showing and to ensure that you have not been the victim of some sort of identity theft.

All these suggestions may seem like a lot of work and may even seem unattainable, but with some persistence and due diligence, a good or even a great credit score is just around the corner.

Mindy Leisure
Director of Product Development
Advantage Credit Inc of Colorado