Credit 101
Navigating the world of credit can be daunting.
This blog aims to provide some basics about credit health and offers you free resources to ensure your credit stays in tip top shape.
Why is it important?
Your credit scores play a big role in your life. From renting an apartment, to securing a credit card, auto loan and mortgage financing, your credit scores tell a story to the creditor and you want that story to be a great one. Generally, higher credit scores secure you better rates, thus saving you money.
Free Credit Sites
The free credit sites out there often use different algorithms than the actual Mortgage FICO. Wait, what?! That's right. For example, it is very common for clients who utilize Credit Karma to see an estimated score of 750, but when the credit is pulled for mortgage it's actually reporting at 700. There are a few reasons for this. The aforementioned algorithms. Credit Karma may weigh a past late payment less heavily. It may also be timing. The free sites may be calculating your credit score based on the current snapshot in time when you've just made a payment on your credit cards. Most creditors report your payment activity once per statement cycle to the credit bureaus, which are TransUnion, Equifax and Experian.
The Mortgage FICO will likely see your credit card balance midway through the month when the creditor reports to the bureaus. If at that time you are 'maxed out,' meaning you are borrowing the total available line, this will have a negative impact on scores.
Are free credit sites worth using? Yes. You can see trends in your credit, learn how the scores rise and fall, and ensure everything reporting is accurate. Did you know, according to the FTC - Federal Trade Commission, it is estimated that one in five people have a credit report that contains errors? Read to the bottom for my favorite free credit resource.
What makes up your credit score?
This should be a class taught in high school! Here are the factors that make up your credit scores:
Utilization
Utilization is the amount owed in relation to the high credit limit. We are never taught about this! On revolving debts, like credit cards and HELOCs - Home Equity Line of Credits, you can borrow, pay the lines down, and then borrow again. When you open a revolving account it has a max limit (or high limit). Ideally, you never want to owe more than 10% to 30%. That is not very much. I have seen clients with perfect payment history, but poor credit scores, strictly due to the fact all of their revolving debts are maxed out or borrowed to the high limit. A great workaround to bring utilization down is shared at the end.
Length of Credit History
The longer the better. I have always heard credit becomes 'seasoned' after two years. This means saying 'no' to opening new credit cards, and rather taking great care of the ones you have.
Credit Inquiries
Although some do not consider this a pillar of credit scores, it can have a big, and bad, impact on those with less than perfect credit. Another reason to say 'no' when you are offered that 0% credit card at the store. Reserve your hard inquiries only for necessities. We all need to apply for Auto Loans, Mortgages, and Credit Cards occasionally but protect your credit from inquiries like a Mother Goose protecting her goslings. A lovely new trend in the mortgage world is the soft credit check Pre Approval process and I am 100% here for it.
Payment History
Those late payments can be a killer! Take advantage of your free, online banking bill pay and set up minimum automatic payments on every single creditor you have. That way if you are ever out of pocket for any reason, your minimum payments are made. Beware to send a few extra dollars. One store credit card I have sneakily changed the minimum payment on me from $25 to $27, and therefore I was considered late. This was caught in time, and rectified, as creditors do not officially report to the bureaus live time, but you can bet I increased all minimum credit card payments moving forward!
Even more terrifying was when one large bank, that shall remain unnamed, but starts with a B and ends with America, collected our mortgage payment on the 30th and applied the whole thing to principal. When we received our mortgage statement and it showed we were late, you can imagine I nearly had a heart attack. I had to call, have them apply that payment to the actual payment, and it was all good. Be sure to read your bills each month! Errors are made, and that requires vigilance from us.
Credit Mix
Think diversity! Diversity is a beautiful thing in life, isn't it? It's great for credit health too. My recommendation is one, or two, credit cards you take great care of. With family across the country, we love our Jet Blue card for the airline miles. In addition, a mortgage, a HELOC - home equity line of credit, a checking account overdraft, student loans for some, and most of us have an auto loan or two, to help keep your credit mix healthy.
New Credit
This should be pretty evident now. As a recap, why is new credit not favorable? That's right, because it's a hard credit check AND an unseasoned account. The good news is if you do everything else well, such as have long time established cards with high credit limits and on time payments, as well as a healthy mix of accounts, you can occasionally take advantage of a low rate account. We have successfully taken, used, and closed furniture accounts, health accounts, and more while maintaining excellent credit.
Surprising Stats
Understanding some of the 'SURPRISE!' stats can help set you on the road to credit success.
- Should you close accounts? If you close every account you have, you then have no credit for the bureaus to judge and therefore no credit scores. It is healthy for auto loans and mortgages to close when you pay then off. It is healthy to close accounts with late payment history if you have robust history in other places. It is healthy to pare down open accounts to a manageable level. BUT if you have a long standing revolving account, with perfect history, keep it open!!
- Should you pay everything off? This seems counterintuitive. We should WANT to eliminate debt, yes? While I stand by eliminating debt, we also have to keep in mind you need to carry some balance on your accounts for a credit score to be calculated. The answer is no, do not pay everything off. Rather, pay it down. If it is one of your 'keeper cards' then keep using it and keep it at a balance you can pay down to $100 each month.
Nicole's Expertise
Nicole Kittredge emphasizes the importance of understanding what makes up your credit scores, how to keep credit healthy over time, and why it is important. What if your credit is less than perfect? We have resources for you! We highly recommend Adam Briggs of National Financial Credit Group, as well New American Funding has a great partnership with a company called UQUAL. Depending on the needs of our applicants, we will direct them to one, or both, of these great resources.
Credit Tips
- Authorized Signer One super tip learned from Adam Briggs to boost credit is to be added as an 'Authorized User' on well established credit card accounts. This is great for someone looking to boost their limited credit. If you have a family member with a credit card opened in 1994, with a $30,000 high limit, and balance generally $3,000 or less (10%), your credit will get a boost from having that length and strength of credit history added. My recommendation is when you receive the card, store it in a secure place, and forget about it.
- www.annualcreditreport.com This is a site in which you can view your credit history for free. You can check each bureau once per year. Get into a habit of checking Experian in February, TransUnion in June, and Equifax in October for example. This ensures you are monitoring for errors. You can pay to see your scores if you wish. This is one of my favorite, free resources to share with clients.
- Free resources Speaking of free resources, from the free credit scores your credit card offers, to free online banking bill pay, to free conversations with experts like Adam Briggs, your credit health is in your hands.
- No Credit Starting from scratch? A secure credit card is a super tool. Contact me for the latest and greatest offerings we are seeing for these. Mr. Briggs shared one that opens this type of account with a soft credit check. WIN!
- Line Increases You know now that the higher your limits are on revolving debts, and the lower the balances, the better your scores will be. If your creditors offer you line increases - take them! You may also reach out, tell them you do not want a hard credit check, but you do request a line increase. This can be a great way to bring utilization down. Of course do not use the new available credit.
- Fight for your right If you have a dreaded late payment, it cannot hurt to fight it! In fact, fight anything that is negatively impacting your scores.
- Negotiate If you have collections or chargeoff, or both, did you know that paying them off can activate 'bad credit' and bring your scores down? Working with a credit expert they negotiate for you to pay pennies on the dollar, and have the accounts settled in such a way it is more favorable for your credit. Do not just payoff these derogatory accounts. Work with an expert and/or negotiate.
Nicole's Closing Advice
Nicole encourages those with questions to reach out any time. It is a pleasure to help clients understand the process, and go from poor credit to mortgage ready. You can do it!
