If you have bad credit, would like to improve your credit score or repair your credit - READ THIS...
I am contacted on a daily basis by clients looking to purchase Orlando real estate with less than stellar credit. It's my personal belief that everyone can benefit from understanding how the credit reporting agencies rank you on your credit and what you can do to improve or repair your credit score.
I'm not going to cover in any great detail the benefits of why it is good to improve your credit. I think we all understand the benefits of having a good credit score. There have been countless case studies performed which you may research on your own time that show how having good credit can save the average person hundreds of thousands of dollars over their lifetime and millions of dollars in investment opportunity that otherwise could be loss by having less than perfect credit.
Over the next couple of weeks I will be putting together a series of blog posts and reports that will help you understand how credit works, how to repair bad credit and how to improve your overall scores. If you have a good understanding already of how credit scores work this will be a good refresher for you. If you have limited knowledge about credit scores or have bad credit, then these reports will be a MUST READ.
How Can I Obtain My Credit Score?
One place to order your credit report is from MyFico.com. You can order all three reports for about $47.85. The three reports you will want to order are from Equifax, Experian and TransUnion which are the three major credit reporting bureau's that most companies look at when considering you for a loan, a mortgage or a credit card.
Contrary to popular belief, your credit score will not be negatively impacted by ordering your own credit score. You only lose points when a third party orders your credit report for the purpose of lending. I'll talk more about this in a future post.
What Is Considered A Bad Credit Score?
Many people ask me what is considered bad credit? The truth is that the score that is viewed good or bad ultimately depends on the person loaning you the money. Many will simply charge a higher interest if they put you in a high risk category. So having a low score does not necessarily mean that you won't be offered the loan, but more than likely you will be asked to pay a higher rate of interest or be required to submit a larger down payment. What's important is to obtain the highest score possible so you are eligible for the best rate possible. Credit scores are exactly like dieting in this regard...there are a few quick fixes, but mostly it takes a lifestyle change which will include time and dedication to achieve the overall long-term objective.
The majority of the people in the US have a FICO score of 700 or higher, therefore many lenders use 700 or 720 as the cut off point for what is considered to them as "Good Credit," and to which they offer the best rates. Many also use the score of 620 as the cut-off point for any type of lending (though not all). Those companies that deal with borrowers below that level are called 'Subprime lenders'. The term subprime typically refers to borrowers that are considered risky or less than 'Prime'. Below is a list of credit scores and the percentage of Americans that fall into each category. This list should give you a good idea of where you stand in comparison to other Americans:
300-499 - 2%
500-549 - 5%
550-599 - 8%
600-649 - 12%
650-699 - 15%
700-749 - 18%
750-799 - 27%
800-850 - 13%
The Five Most Important Factors That Affect Your Credit
Before I get into the nuts and bolts of actual credit building, let's take a look at the most important factors that will affect your overall credit scores, then later we'll move onto the specifics.
1. Your Payment History
Your payment history makes up 35 percent of your score. This makes a lot of sense as lenders want to know whether you pay on time and how long it has been since you last had a late payment or if you've had one at all.
When it comes down to negative marks like late payments, your score will focus on three different areas:
Recency - How recently you got into trouble. The more time that goes by, the less it will affect your score.
Frequency - It's logical that someone that has had only a few late payments will look better to a lender than someone that is frequently late making payments or frequently defaulting on payments.
Severity - There is a definite hierarchy when it comes to how bad each offense is. Obviously being 30 days late isn't as bad as being 120 days late, being in collections, having tax liens or a bankruptcy on your credit.
2. How Much You Owe
How much you owe makes up 30 percent of your score. This takes into consideration how much you owe on all of your accounts as well as how much individually is owed on each account.
To put this in perspective, most Americans use less than 30 percent of their total credit limits. Obviously you want to be in a range that is considered the norm or above normal. Those that have maxed out their cards or use up their available credit have a higher default rate and are viewed as a high risk to lenders.
You should try and keep each of your credit card debts under the 30 percent range. This score also looks at how much you owe on installment loans such as auto loans and mortgages, compared to what you originally borrowed. Paying down balance over time will help your score on installment loans.
3. How Long You've Had Credit
How long you have had credit lines will make up 15 percent of your total score. You can have a good score with a short history, but the longer you've had open credit lines, the better the score will be. To put this into perspective, the average American's oldest account has been established for about 14 years. The score considers the age of your oldest account, as well as the average age of all of your accounts.
Therefore, if you are trying to improve your credit it is not always wise to close out older accounts as closing down an account may reduce the overall average of the age of your trade lines.
4. The Last Time You Applied For Credit
Applying for credit will make up 10 percent of your overall score. Applying for credit can ding your score a little and applying for lots of accounts in a short period of time can seriously impact the score. The average American has not applied for credit or opened a new account in 20 months. It makes sense that someone that is in financial trouble may apply for a lot of new credit accounts to help them through a rough period of their life, therefore making them a credit risk in the eyes of a lender.
The score also takes the following factors into perspective:
How many new accounts have been applied for;
How many recent accounts you have opened;
The length of time since you last applied for an account;
The length of time since you last opened an account.
When people are buying real estate here in Orlando, they often ask me if shopping around to different mortgage brokers for a better rate will hurt their credit? This is a myth that many mortgage brokers are still using to stop you from going to their competitor. Providing you are shopping around in a concentrated period of time, it should not affect your credit score. I'll talk more about this later as we begin to discuss some of the credit score myths.
5. The Types of Credit That You Use
The types of credit that you use will make up 10 percent of your score. The FICO formula wants to see a healthy mix of credit.
To get a healthy score you typically need to have both revolving debts like credit cards as well as installment debts like a mortgage, a car payment or a personal loan. Additionally, the major credit card companies like Visa, AMEX, and Discover are better than department store cards.
To put this into a better perspective, the average American has 13 trade lines showing on their credit report with typically 9 credit cards and 4 installment loans.
- I hope this has provided you with a good introduction to credit scores and what lenders are looking for. Please check back over the next couple of weeks as I update new reports on building your credit, repairing your bad credit and cover other items such as identity theft and common myths and misconceptions regarding credit scores.
Feel free to contact me at any time, should you have any questions relating to Orlando real estate or credit worthiness. I may be reached directly at (407) 346-5331.