Are you thinking of buying a home but need to get your credit on track? Getting started can feel a bit daunting. After all, it can sometimes seem as if credit agencies want to keep you in the dark about how they calculate scores. Not to worry - with some diligence on your part and a little insight into the world of credit score-keeping, you can get back on track.
What is the truth about a credit score? A credit score tells lenders about your creditworthiness (how likely you are to pay back a loan based on your credit history).
When you begin a loan application your lender will obtain a specific score from the information provided in your credit reports. This is typically a FICO score, which is the standard for credit scoring that is used by 90% of top lenders.
FICO credit scores follow an algorithm first developed by the data analytics company years ago. For a while, credit scores weren't the primary force behind a credit decision, but over time the impact of a credit score became more and more critical. Most every loan program available today has a minimum credit score.
There are five characteristics of your credit history that make up your three-digit score: your payment history, account balances, the length of your credit history, the types of credit used, and how often you've applied for new credit. Credit scores will improve much more quickly by paying attention to the two categories that have the most significant impact on a score: payment history and account balances.
Payment history accounts for 35 percent of the total score. When someone makes a payment more than 30 days past the due date, scores will fall. An occasional "late pay" won't do much damage to your score, but continued payments made more than 30 days past due definitely will. Preventing late payments is key to recovering your score.
Account balances compare outstanding loan balances with credit lines and comprise 30 percent of your score. If a credit card has a $10,000 credit line and there is a $3,300 balance, scores will improve, as the ideal balance-to-limit is about one-third of the credit line. As the balance grows and approaches or exceeds the limit, scores will begin to fall.
The remaining three have relatively little impact. How long someone has used credit accounts for 15 percent of the score, but there's nothing anyone can do to improve this area other than to wait. The types of credit and credit inquiries both make up 10 percent of the score. By concentrating on payment history and account balances, scores will improve significantly over the next few months.
Feel free to contact me with your real estate questions. Whether buying or selling a home, we are always happy to meet with you to discuss your wants and needs, no obligation.
Eric Slifkin, a Broker Associate, is the founder of the Slifkin Team at Keller Williams Realty. Eric and his team of experienced agents serve South Florida and the Treasure Coast, including Stuart, Port Saint Lucie, and the Palm Beaches.