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Credit 101

 

Today, to get approved for a mortgage and qualify for the best rates, good credit is more important than ever. When you apply for a mortgage to purchase or refinance a home, lenders need to determine your credit worthiness. They look at your credit score, most often the FICO Score, along with factors like your debt-to-income ratio, employment and credit history.

 

Your credit score helps us decide on the size and cost of a loan and predicts, based partly on your past behavior, how likely you are to repay the mortgage. Lenders use this score to help determine what type of mortgage you’re eligible for, whether to approve your loan and your interest rate.

 

Here are some ways to raise your credit score, but be patient – it may take a month or two before you see the increase.

 

Correct your credit history

Reviewing your credit report and correcting any mistakes raises your score, which is based on your credit history.

 

Reduce the amount you owe on credit cards

Pay down all card balances, so the amount you owe at least or below 50% of the card’s credit limit. This is called your “utilization ratio.” If your limit is $2,000, for instance, you want to owe no more than $1,000 (the lower the ratio the better). If you can’t pay down a balance, try moving it. One card may be maxed out, but if others have small balances, move some of the big balance to the other cards, so all three have less than a 50% utilization ratio. Also try raising a card’s limit – call the bank and ask. An $950 balance on a card with a $1,000 limit is an 95% utilization ratio. Get the limit up to $2,000 and that utilization ratio goes below 50%.

 

Start using a card you haven’t touched for a while

This sends a report to the credit bureaus, increasing your available credit and helping the utilization ratio. And since the length of your credit history contributes to 15% of your score, using an old card might help there too. 

 

Pay all bills on time

This one is a no-brainer!  Just one 30-day late payment can lower your credit score 20 to 40 points. Make sure you always pay on time, even if you’re only paying the minimum.

 

Focus on revolving accounts versus installment accounts

Revolving accounts, such as credit cards, let you carry a balance and pay a monthly minimum amount. Installment accounts require you to pay a fixed amount each month, like an auto loan. If you have money available, use it to pay down your credit card balances, not to pay off your auto loan sooner. This is because your credit score is heavily weighted to revolving accounts.

Don’t open a new account

This can be good and bad.  Sometimes you need to open accounts because you have an insufficient credit history, just remember that this lowers your score temporarily and makes a new creditor, like a mortgage lender, less eager to open another account for you.

 

DON’T close any accounts

This is even more important than above.  Remember credit is based in part on your history and current ability to repay your debt.  The less you have reporting the less chance you have of showing your ability to repay.  Closing credit accounts therefore lowers the amount of credit available to you and therefore lowers your Credit Score.  Too many accounts can also have a negative effect on your credit, so there is such a thing as “too much credit”.  A good rule of thumb is to try not to exceed more than 5-7 open credit cards.

 

Understanding the mathematical algorithm is difficult even for the most seasoned Mortgage Loan Originator.  If you have questions and or concerns about your credit it is best that you sit with one of our Mortgage Loan Consultants for a more tailored approach to your specific situation.  

 

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