Credit Scoring Today

by JoAnn Young, Owner / Principal Broker of People's First Financial Services, Melbourne, FL

A local Realtor recently approached me to pre-qualify a borrower for FHA financing.  In the course of the conversation I discovered the borrower's credit score was below the minimum requirement for FHA financing.  In which case I immediately offered to help the borrower improve his credit score in just a few short steps.  I'm going to share with my readers those same steps I shared with my recent borrower who will now be ready to buy his dream home in just a few months instead of many indefinite months.

First, one needs to know what makes up a credit score.  Credit scoring is a computer model that takes into account several areas of how a consumer uses his credit.

35%  Timely payments & payment history

30%  Amount & type of outstanding debt

15%  Length of credit history

10%  Mix of credit accounts such as credit cards, department store cards, finance company loans, bank loans

10%  Number & type of accounts recently opened

If you've been told to CLOSE accounts you are not using, that is incorrect information.  15% of your score is derived from the length of the credit account.  If you've had an account for 30 years & it is your longest running credit item, that would not be a wise choice.  The computer model takes into account ALL your existing open lines against your current balances as a ratio. The more lines you close, the higher that ratio becomes thus lowering your credit score.  Just make sure you are using that account a few times a year to keep it open.  The creditor has the right to close any inactive accounts. 

If your balance to line of credit ratio is too high, your score can decrease.  You can call the creditor and ask for a credit line increase to lower that ratio thus raising your score if you are in a position that you need to increase your credit score.

A sure fire way to lower your credit score is to continually apply for different types of credit accounts.  Each type can lower your score 3-5 points for each inquiry!

Do not increase debt!  Keep your balances low in respect to their credit limits.  It is better to spread out balances on two different cards than to borrow the same amount against one credit card. 

If you are applying for a mortgage and you have a family member who has offered to give you a "gift" to help with your down payment, you would be better off to use those funds to pay off or reduce your debt.  This will increase your buying power enabling you to afford more in mortgage payments as well as increase your credit score.  Make sure you do this about 45-60 days before applying for the loan in order to give the credit reporting system time to adjust and having to provide less paperwork to underwriters on where those funds came from.

TIP:  If you pay off a collection or charge off, ALWAYS keep a paper trail and receipts.  If this item is discovered later to still be on your report, which often happens and you have no "proof" that you paid it off, you will more than likely not be able to have it removed should there be a dispute later.

If you have had a bankruptcy or a foreclosure recently, you will need to begin to re-establish your credit.  Start with a secured credit card with your bank.  Put up $500 and begin using the card & pay on time or pay off the balance in full each month.  Eventually your credit will be extended by other credit card companies as well.  I am not advocating going into debt.  However, I am advocating you becoming a good-standing, credit using consumer once again enabling you to obtain the best rates and programs available for financing in the future. 

There are finance companies that will lend you money but at a much higher interest rate due to the risk it imposes to THEM.  The higher the interest rate, the higher the payment.  This would make it more difficult to qualify for other loans such as a mortgage or it could mean buying less house due to income versus outgo restrictions in your budget.

If you would like to find out how much you can qualify for a home I'd be more than happy to assist.

If you would like more information about credit and credit scoring call JoAnn Young, Owner & Principal Broker of People's First Financial Services, Melbourne, FL  321-243-4917 direct or email at JoAnn@PeopleComeFirst.net