As most homebuyers know, your FICO score (the credit score created by Fair Isaac Corporation) rules your world!
…did you know that the big three credit services base a large part of your credit scores on the “balance due” to “card limit” ratio??
Your FICO credit score will not just determine if you can get a mortgage, but what interest rate you will pay for it. And, did you know that that little three digit score can also affect the price of your home and auto insurance? It can even keep you from getting the job you want!
Your FICO Score is calculated by a mathematical algorithm that evaluates many types of information from your credit report.
We all know that a history of paying bills late can be very detrimental to your score (generally accounts for approximately 35% of your score). But, did you know that the big three credit services (Equifax, TransUnion and Experian)base a large part of your credit scores on the “balance due” to “card limit” ratio?? This ratio can accounts for approximately 30% of your score!
My husband and I try very hard to live a “debt free” lifestyle. As part of that plan, we usually charge everything to a credit card and then pay it off at the end of the month which makes it very easy for us track spending and keep our budget under control. You would think that would mean that we are using zero (or a very small percentage) of our available credit, but that it not how it works!
Here is an example of how the credit services look at this scenario: If we have a $10,000 limit on our Visa card and we spend $5,100 per month (easy to do when you have monthly business expenses in additional to personal spending) the credit companies consider it to be as if we are using 51% of your available credit… even if you pay it off at the end of the month! What???? This plan can actually lower our credit score.
Here’s the REASON - the credit services only receive information from your credit card companies once a month, so they never see the paid off balance only the outstanding balance due!
To keep our score from being affected, we have chosen to split our purchases over 2 cards (1 for business and 1 for personal) to guarantee that we never use over 30% of the available credit on any card.
I recommend that you look through the credit cards in your wallet… including all the ones that give you coupons or discounts in a department or home improvement store…. these usually have very low credit limits and this rule applies to them too!
The best advice I can give someone preparing to buy a home in the near future is review your credit report NOW and pay down every credit card to reach a balance due of 50% or less (30% is preferable!).
And… speak to a lender to get pre-approved.
If you are not currently working with a lender and need a referral to a local Forsyth/Fulton/Gwinnett County (or anywhere near metro-Atlanta) mortgage pro, give me a call and I’ll gladly provide you with a copy of my “preferred lender” list.