“Credit is one of the key components when qualifying for a mortgage.” – Captain Obvious. Everyone knows that credit is important and plays a huge role when obtaining a mortgage but here’s what they don’t know:
1. You can Opt Out of Unwanted Credit Solicitations – it’s free and you should do it
2. Lenders Update a Credit Report Before Closing – it’s a must read to prevent any last-minute issues
3. How to Remove Credit Disputes – not applicable to most folks but good info if needed
After you’re done reading the information below and the links above please visit the Do’s and Don’t During the Mortgage Process – you will be held accountable should something happen during the process and one of these items is violated! Everything below is for your information and good information.
Credit is extremely specific and so complex that everyone’s situation is unique; therefore, please call us if you would like to discuss your credit in more detail as we’re here to help.
The Five Categories of Credit
There are five factors that determine your credit score: payment history, debt utilization, length of credit history, type of credit, and inquiries. Check out each section for the highlights of what you need to know.
To nobody’s surprise, paying your bills on time has the greatest weight of all the categories so pay your bills on-time. The credit scoring system evaluates how many late payments you have had and whether they were 30, 60, or 90 days late, or worse, in default. These systems look at whether the late payments were consecutive. Here are four practical (and obvious) steps that you can implement to improve your credit score:
- Make all your payments on time. (Duh!)
- Bring delinquent accounts to current as soon as possible.
- Pay your bills before they go to a collection agency.
- Check your credit report for accuracy on a regular basis and dispute any erroneous information.
Debt Utilization is just a fancy way of saying: how much credit do you have available versus how much do you actually use. Therefore, it is not how much you owe, but how much you owe compared to what you are able to borrow. Keeping your credit balances below 50% is good and below 30% is even better.
A quick trick to increase your credit is to call your credit card companies and try to increase your available credit lines.
Example: If you owe $1,000, and you have $10,000 of credit available to you, you are only using 10% of your available credit line and the credit models love you. On the other hand, if you owe $1,000 and you only have $1,000 available for use, you have “maxed out” your available credit and your credit scores will be very negatively impacted.
Note: the scoring system doesn’t have a memory when it comes to balances. In other words, the credit models don’t care if your card was maxed out last month but paid now; or vice versa. The score is based solely on what’s reported at the time the time of the credit pull.
The longer your accounts have been opened the more the credit models like you. Newly opened accounts will bring your score down for the first 12 months- but especially in the first 6 months – so don’t go opening any new accounts before (or during) the home buying process. Here are three practical steps for you to improve your score in this area:
- If you are going to close your account, close the newest credit cards instead of the oldest ones. Your score will improve over time if you keep accounts open and use them every once in a while. Call us before closing your accounts and we’ll be happy to offer advice on which tradelines you should close.
- Think twice before jumping on that latest 0% credit card transfer-offer or opening a new card just to get a 10% discount at a department store. New credit is seen as a sign of distress. Don’t damage your credit for a random $23 savings at Nordstroms.
- If you don’t have much of a credit history, and you are planning on taking out a mortgage in the future, it may be a good idea to establish a few open credit lines with little or no balance on them. Although newly opened accounts tend to lower your score initially, they will improve your score once they’ve been open for a while, somewhat active, and paid off with little or no balance. Again, call us if needed.
A good mixture of auto loans, credit cards, and mortgages is always best. Ideally you should have a mortgage, an auto loan, and 3 credit cards. Again, this is “ideally” and a guideline. As stated above, credit is very specific to a person so call us if you have any questions.
Inquiries appear on your credit report for 120 days and are treated differently based on the type of inquiry.
“Soft” inquiries are made by companies that you already have accounts with and these types of inquires do not hurt your credit. For example, a credit card company will do a soft inquiry to view your current credit status and ensure you’re still a worthy credit risk – i.e. they’re looking for an excuse to increase your rate.
A “Hard” inquiry is any inquiry where your credit is pulled for new credit. These include credit cards, automobile, and mortgage companies. Here are three steps you can take to improve your score in this area:
- Multiple mortgage and automobile inquiries are treated as only one inquiry if made within 45 days of each other and typically don’t hurt your credit. So it’s better to shop for a car or a mortgage over a two-week period, rather than to prolong it over a longer timeframe.
- Don’t apply for a lot of credit or open multiple credit cards at the same time. New credit is seen as a sign of distress.
- If you’re thinking of applying for a mortgage within the next 90 days, it would be good to wait until after your home loan closes before you apply for any new credit.
As stated, please call us if you would like to discuss your credit in detail. We’re here to help.