A partial guide to your credit

 

© Petr Kratochvil

© Petr Kratochvil

 

As you likely realize, credit is an important ingredient in many parts of the real estate process. Obviously, a good credit score helps you qualify for a mortgage loan. Beyond that, however, a credit score represents you to someone looking to understand a few important facets of your personality. Are you trustworthy? Do you commit to goals and achieve them? Do you have good time management skills? A high credit score answers each of those questions with a resounding “yes”.

With that importance established, I’d like to give some advice to those less familiar with the structure of credit – or those who might want to learn a bit more detail for the future. This guide by no means will be exhaustive, but will hopefully provide those interested in learning a place to start. To begin, let’s look at what exactly that credit score is made of. Scores range between 200 and 850, with the optimal number to obtain a mortgage generally being somewhere above 620. Your score can be affected by:

  • Your payment history. Did you pay your bills on time? Have you filed for bankruptcy? These as well as collections activity are the biggest drains on your grade.
  • How much you owe and where. If you owe a large sum across multiple accounts, you might be considered overextended. Spreading that debt among several accounts helps you avoid the maximum on any individual credit line, and shows your capability when it comes to handling lent finances.
  • The length of your credit history. In general, the longer the account has been open, the better.
  • How much new credit you have. Installment plans can be considered more risky, depending on the situation.
  • The types of credit you use. Generally, a diverse portfolio of credit cards and loans is better.

So, you have your score, and it’s… not great. Don’t worry just yet – there are ways to improve your credit score. Keep your number high by keeping the following in mind:

  • Check for errors in your credit report. You can download one free credit report each year at annualcreditreport.com. Correct any errors you find immediately.
  • Pay down credit card bills. If possible, pay your balance off rather than just transferring debt from one source to another.
  • Don’t max out your cards. Show restraint.

Of course, credit scores are crucial to consider when applying for a mortgage – or even when deciding whether to apply for one. Since your score will be the major consideration when your loan amount is decided, it’s critical to ensure that it’s in perfect condition when you apply. Here are some suggestions toward the end of making sure you qualify for the best loan possible:

  • Wait 12 months after credit difficulties to apply for a mortgage. You’ll be penalized far less after a year.
  • Don’t order items for your new home on credit. Wait until after your closing – prove that you can show restraint when it comes to your loan debt.
  • Don’t open new accounts while applying, either. Having too much credit available can also lower your score.
  • Shop for mortgage rates all at once. Having too many credit applications can lower your score. However, multiple inquiries about your credit score from the same type of lender are counted as one if submitted over a short period.
  • Finally, avoid finance companies. These loans come with hefty, often 20+% interest rates. They are even sometimes considered a sign of poor credit management.

 

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