Finally, that home you have been planning on buying is in your sight. Over the last year you made sure that you’ve paid your bills on time. In fact, when you bought that new convertible a year ago the salesman said your scores were over 680! This is good, right?
Along with that new car you wanted to be sure that your new home looked perfect so you took advantage of all of those credit card offers you got in the mail. Now you’re getting excited. You have the right house, the right price, the right car, the right furniture only to get a call from your Loan Officer. What happened?
They tell you that they would love to get you a mortgage but your scores are too low. You’re now a 575. Now you freak out. You can't understand. Just last year you were over a 680 when you bought your car. How could my scores have dropped? I got all those new credit cards! What happened? Let’s take a look.
What is a Credit ScoreWell, there are three major credit bureaus - Trans Union, Equifax and Experian. Each has its own method for calculating your credit score. Scores range from 300 - 900 depending on the bureau. The higher the number, the better your score is perceived. Creditors see the number as an indicator that an individual will repay a loan. Typically, scores are determined by the following factors:
Your history of late payments
Balances owed
Length of Credit History
New Credit
Number of Credit Inquires
Now in the example above you can see what happened. The client took on a large amount of new debt in a short amount of time. When you do this you lower your scores. So what should they have done? Let’s take a look at something I call "Keeping Score:"
Let’s say your score is 100.
Out of that 100:
35% is based on your credit history. It is highly weighed against the amount of late payments. Your score will get "hit" less after two years and the late payments will fall off after 7 years. Also a bankruptcy, foreclosure, repossession, collection, and judgment will have a negative effect on your score.
30% is based on your Debt Ratio. The credit bureaus do collect employment and income information and your debt-to-income will have an affect on your score. (A more detailed blog on the DTI ratio will be published at a later date. Make sure you come back. It's important)
15% Credit Length - In a nutshell, how long have you had your credit.
10% Credit Type, Mortgage, Automotive, Installment, Revolving (credit card). High number of revolving credit hurts your score.
10% # of Inquiries (When credit is pulled for a major installment such as a Mortgage or Vehicle your score should not be affected in a negative way if the credit pulls are done within 10-days)
So with the example I presented (it is a real story. Names and places have been eliminated to protect the innocent. Come on, it's a little funny). While the client had good credit, by adding the car and all the credit card debt the effect was a 105 point dip in credit score. All this happened while paying their bills on time. Folks, do not be surprised! Real estate agents, get credit early to help structure your deal. Call me if you’re in my market and I will give you a FREE, yes FREE financial analysis that will help qualify your buyers. If you have been reading my blog you know I know what I am talking about.
So now that you been to Tony's 101 of credit scoring how do you improve your scores?
PAY YOUR BILLS ON TIME (what a novel idea). Delinquent payments and collections have a major negative impact on your score.
Keep balances low on credit cards and other "revolving credit." Example department store charge cards.
Apply for and open new credit accounts only as needed. Don't open accounts just of the sake of it - it probably won't raise your score.
Pay off debt rather than transferring it around. Also, don't close unused cards as a short-term strategy to raise your score. Owning the same amount but having fewer open accounts may actually lower your score.
Correct any errors that appear on your credit report when brought to your attention. (Be careful of companies that say they can get rid of your bad credit. Negative items can not be legally removed. PERIOD.) I will also have a future post on this. Wow, you need to be sure to subscribe to my blog. I am going to give you so much education over the next few months that you’re going to make a fortune!
Review your credit report regularly so you know what is being reported. It won't affect your score to request and check your own credit report. (BTW, when you’re my client I set up a annual meeting so we can do this. Guess how much it cost? You guessed -- FREE AGAIN! Starting to wonder why you’re not doing business with me?
If you don't do anything else, do this right now: (don't wait, your already on the Internet), go to http://www.optoutprescreen.com/. This is another FREE service (notice I have a thing about giving away things). What is does is take your information out of the data bases for credit offers. You will not longer get all that junk mail and since you will be less of a credit risk (and that is a good thing) your score can rise from 5 to 50+ points in as little as two weeks. Yes, it really does work!
"OK, I'm starting to listen. How long does it take to rebuild scores?"
The answer: Not long at all! If you take the necessary steps, you can begin increasing your scores right away. I've seen dramatic changes take place within as little as 6 - 12 months.
The first step is to eliminate all derogatory accounts - another reason debt consolidation loans are so beneficial!
Second, make sure that once an account is paid, the credit bureaus reflect the payment.
Third, begin rebuilding credit by making your mortgage payments and car payments on time. Set up automatic withdrawal if possible to avoid late payments. Remember - you have 30-days to make a payment on time before it's considered late on a credit bureau.
After you get your report and find errors you need to contact the credit bureaus. It will not go away until you do something:
Trans Union2 Baldwin PlaceP.O. Box 2000Chester, PA 19022http://www.transunion.com/
EquifaxP.O. Box 740241Atlanta, GA 30374http://www.equifax.com/
ExperianCall 888-397-3742http://www.experian.com/
This is the end of the story. Yes, the story I told above was true. While it took some creative work (including taking some furniture back) I was able to get the client approved and they were able to get the home they deserved and wanted.
Happy Selling!
Tony Grego - Indiana Mortgage Broker
Quote of the Day:Life is an onion. You peel it off one layer at a time, and sometimes you weep.--Carl Sandburg
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