What is a credit score and why is a credit score important?
Part of what we review with first time home buyers is your credit score and how it impacts you. It's important for the home buyer to understand that the better their credit score is the better deal they will have when purchasing real estate.
Let's step back a bit first, and then we'll tie it all together. There is an industry standard in the US called a FICO (Fair Isaac Company – which is a company that provides analytics. Including credit scores to financial institutions) that develops a financial representation of a person's creditworthiness. Think of creditworthiness as an assessment of how likely a person is to pay their debts. The FICO score is a calculated statistic developed from a consumer's credit history. It allows lending institutions to guestimate how much of a risk a borrower might be.
FICO scores run in the range of 300 to 850. 60% of FICO scores land between 650 and 799. Things taken into consideration, that impact the make-up of your FICO are as follows:
- One of the largest factors (35% of the score) is a person's promptness in paying their bills. Is the bill paid in full? Are bills paid on time? Are there any past due statements? - For more than one month?
- The FICO score takes into consideration how much has been borrowed in comparison to how much is available to be borrowed (the closer you are to the limit the worst the impact). It's best to keep this under 50%.
- How long of a credit history do you have. A new borrower will not fair as well as a borrower with a long history.
- How many credit accounts does the borrower have? If several accounts are opened in a short span of time, that's a potential red flag. So for example, if you have a mortgage, a credit card, an a credit card to a specific store, and these are all paid on time, that will help your credit score. On the other hand, if all of these accounts were opened within a short period of time, that can be bad for your credit score.
So why is this important? First off it determines your ability to access capital. Lousy credit score (under 600 or 650) means that you don't have a really good chance of being approved for a loan – at least at an affordable interest rate. Also, were you aware that the higher your credit score is the lower your interest rate will be? There's a huge difference in paying off a loan at 5% interest when compared to paying off a loan of equal amount at a 15% interest rate. And the more you borrow the larger that gap will be.
Be good to your credit and it will in turn be good to you. Use responsibly.
If your interested in learning more about the Superior, Colorado or Louisville. Colorado area, I invite you to contact me. Even if your not in the housing market. This is an amazing area and I love sharing things about it - I can give you an insider's look into the area, as only a “local” can.