Credit scoring is a important tool that provides lenders like Matt Keway from Icon Mortgage with a way of determining the level of risk they accept when loaning money to individuals. A higher credit score indicates that you manage debt responsibly, and increases your chances that a lender will say YES to your request to borrower money to buy a home. There are multiple factors in determining a credit score. Familiarizing yourself with these aspects will help you navigate the murky waters of credit score confusion.
Payment History when it comes to your credit score is important
• Do you pay your bills on time? If you do not then your credit history will reflect this and your score will be low. On time payments let lenders know that you take your obligations seriously. Payment history has the most significant effect on credit scores and is a key factor lenders consider in determining risk; if you have missed payments its water under the bridge and you just have to make on time payments for a while to get past that and your credit score will go up in time.
• How much do you owe? If you have credit cards that are maxed out, this will impact your credit score negatively. Your credit score goes up and down monthly based on many factors but one of the biggest and most important factors in your credit score is the amount you owe on your revolving credit cards vs your credit limit; you may have a 700 FICO score today but if you make a large purchase on one of your credit cards then next month it could be several points lower until you pay the balance down; credit cards were not invented to live off they are meant to use in lieu of cash and pay off immediately however most people have huge balances which decreases their credit score. Lenders want to see that you have credit available, but that you have borrowed against it responsibly. Ideally, you want to have 25% or less of credit owed vs. credit available. To determine this, look at the credit limit for each account and compare it to what you owe. This is the second most impactful factor in determining a credit score.
Length of Credit History is important
• The longer credit history you have, the better lenders can see your borrowing & repayment habits. Life’s ups and downs can impact individuals’ finances and the way in which they utilize their existing credit lines. Demonstrating responsible history over time is the next most impactful factor in determining credit scores. YOU MUST HAVE RECENT CREDIT HISTORY, if you pay off all your credit cards, auto loans etc. and pay cash for everything then over time your credit score will fall dramatically! I have a lot of retired people that come to me and think their credit score is great but tell me they paid off everything and pay cash only and when I run the credit their score is 0 or a no score because the system has no data to go by; always have a credit card or two to keep your FICO score up you don’t have to use it though. Keep in mind with the credit score model you just have to have credit extended to you, the credit doesn’t need to be used; I would just use it once in a while to keep the card activate and pay it off before interest insures.
Mix of Credit Lines
- Having different types of credit lines in your history can also enhance your scores, as it can demonstrate responsible history of credit utilization over a larger scale. However, this is a smaller factor in determining your overall credit scores and shouldn’t be a motivation to acquire additional debt just add to your mix of credit. Again don’t worry about this too much, if you have paid off your home and auto just keep a few credit cards open and you will be fine, you certainty don’t have to go get a RV loan or some other “term” loan to keep your score up.
New Credit & Inquiries
- Recent multiple inquiries on a credit profile can create the impression that an individual is planning to acquire new debt. Don’t worry though while applying for a mortgage loan, when you apply for a mortgage loan and while shopping other lenders you’re only hit for one inquiry from the first time a mortgage lender runs our credit throughout the next 90 days; this encourages buyers to shop while not worrying about their score dropping. However DO NOT obtain any new credit after being approved for a mortgage loan as this could not only severely lower your credit score but may make you ineligible for the loan you were approved for because of DTI or debt to income.
No Matter what kind of loan you are trying to get weather it be a FHA loan, a conventional loan, a Rural Development, or Even VA loans your credit score is important. I hope this was helpful. If you know anyone who could benefit from the information above please take to share the link with them. If you would like a introduction to a top realtor in Genesee County, Shiawassee County, or Livingston County you can all feel free to use Matt as a resource because if you can find a home for sale he can not do your loan.
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