Your Credit Score - What You Should Know Before Buying a Home for Sale in Charlotte!
Your credit score is a very important to your financial well-being, so it's vital that you monitor your score (and even repair it) before buying a home for sale in Charlotte!
Your credit score can impact many things in your life:
- Your ability to obtain the best interest rates for a home mortgage, or even to qualify for a mortgage at all
- Your ability to obtain a car loan, credit card or other type of revolving credit
- Your ability to obtain a small business loan
- Your ability to rent a place to live
- Your ability to obtain the best insurance rates
- Your ability to be hired for a job
Whew! This important 3-digit number is being used more and more for all sorts of decisions by lenders, employers and insurance brokers because statistics have shown that your credit score is a good predictor of future risk. For a financial decision as major as buying a home in Charlotte, the savvy buyer will fix or improve his score BEFORE applying for a mortgage in order to get the best rates and save tens of thousands of dollars over the life of the loan.
I just read a phenomenal book on credit scores by Liz Pulliam Weston, the Internet's #1 personal finance columnist, entitled Your Credit Score - Your Money & What's at Stake. This book should be required reading for everyone, from graduates to retirees. I'm going to summarize what I learned below.First, Weston shares the history of credit scoring, initially developed by the Fair Isaac Corporation, now called FICO. Credit scores today are based on the largest lending databases available at the three major credit bureaus: Equifax, Experian and TransUnion. These credit bureaus calculate the behavior of millions of borrowers over time, and predict which borrowers are most likely to default on their debts.
Second, Weston describes what constitutes a "good" credit score - she says many lenders use a score of 720 as a cutoff for their best rates, and many lenders will not lend money for scores below 620. 58% of the US population has a FICO credit score of 700 or above; another 27% have scores between 600 and 700. These ratios and thresholds vary among lenders and over time.
Next, Weston sheds light on the 5 most important factors that affect your FICO credit score:
- Your payment history. This factor accounts for 35% of the average credit score. Do you pay your bills on time? (over 50% of Americans have never had a late payment on their credit score!). Late payments are judged by how long ago it happened, how often it happens, and how severe it is (30 days late vs. bankruptcy).
- How much you owe on your accounts. This makes up 30% of the average score. Have you "maxed out" one or more credit cards? Being close to your credit limit on three accounts will hurt your credit score far more than having low or zero balances on 10 accounts. Helpful hint: Even if you max out a credit card one day and pay it in full the next day, your credit score may be harmed if your balance is reported to the credit bureau before it gets paid off. Try to keep your credit balances below 30% of your credit score, according to Weston.
- How long you've had credit. 15% of your total score. Your score looks at both the age of your oldest account and the average age of all your accounts. Hint: Don't close out an account when you pay it off!
- Your last application for credit. 10% of your score. Opening new accounts can zap your score, especially if you open a lot of new accounts over a short time period (lenders may see this as a sign of distress!) Weston says, contrary to urban legends, you will not be penalized for inquiring into your OWN credit!
- The types of credit you use. 10% of your score. FICO is looking for a "healthy mix" of credit, according to Weston. These would include installment loans (mortgage, car loan, personal loan), and bank cards (VISA and Amex for example). Department store credit cards and other finance company cards are not as helpful to your credit score.
My favorite part of Weston's book is the chapter called "Credit Scoring Myths." She de-bunks several myths, including the following:
- Myth 1 - Closing credit accounts will help your score. Weston says that closing accounts wipes out your credit history, and reduces the total credit available to you. Although it sounds counter-intuitive, closing your revolving accounts will NOT improve your credit score!
- Myth 2 - You can hurt your score by checking your own credit report. No! You can't improve and protect your score without checking it. What WILL hurt your score is various lenders and credit cards "pulling your credit" often, over long periods of time.
- Myth 3 - You can hurt your score by shopping for the best rates. I have lots of buyers who've been told that shopping around for the best mortgage rates among lenders will ding their credit. But FICO knows that savvy shoppers will compare rates, and therefore the "FICO formula ignores all mortgage- and auto-related credit inquiries made within the previous 30 days," according to Weston. However, you CAN hurt your score by having a lender pull credit in January, and again in July and October.
- Myth 4 - You don't have to use credit to get a good credit score. Again, it seems counter-intuitive, but a person who refuses to use credit and live within his means may have a worse credit score than someone who uses credit wisely.
- Myth 5 - You can boost your score by asking VISA to decrease your credit limit. Weston says that it's better to have a higher credit limit with a low balance than a lower limit with a high balance.
- Myth 6 - you have to pay interest to have a good credit score.
- Myth 7 - Credit counseling is worse than bankruptcy. Nope, bankruptcy hurts your score the most, and credit counseling is treated neutrally by FICO - won't help or harm your score. Weston warns about unscrupulous credit counselors in chapter 6.
Weston's book provides lots of advice on how to repair your damaged credit score - the right way. Here are some of the highlights, but her book provides some super helpful advice:
- Review your credit report and check for any errors. By law, you are entitled to receive a free copy of your credit report from each of the 3 main credit bureaus once a year. Dispute any errors.
- Pay your bils ON TIME! (duh!)
- Pay down your debt. Reduce what you owe compared to your credit limits. Don't just move debt around. Strive to owe less than 30% of your limit on all credit cards.
- Don't close credit cards or other revolving accounts. Pay them down, yes, but don't close them. Keep your oldest account active.
- Apply for credit sparingly. Resist the urge to apply for store cards when they tell you that you'll save 10% today by opening an account, Weston says. Don't apply for credit that you don't need!
Weston's book is full of anecdotes and case studies of actual borrowers who have run into credit problems, and how she advises them to repair their credit. Although the topic of credit scores could put many people to sleep, Weston's writing style and easy-to-understand advice kept me interested throughout the book.
Your credit score is vitally important to your financial health! Read Weston's book to find out what you should know about your credit score before buying a home for sale in Charlotte!
Disclaimer: I am a Realtor, not a financial advisor, CPA, or lender! Please consult your trusted financial advisor about repairing and protecting your credit score. If you are a Charlotte home buyer and would like to speak to a trustworthy and knowledgeable mortgage lender, I would highly recommend Rebecca Madej of Cunningham and Company Mortgage!
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