Many people are dealing with issues involving debt or poor credit history, but most aren’t necessarily aware of what exactly makes up their credit score. Unfortunately, it might seem like it’s the big stuff that counts when it comes to credit, but little things can have a significant impact on your financial health. If you’re looking to improve your understanding especially when looking to get pre-approved for a home loan or just to ensure you get the best rate and payment on your mortgage to buy a home or refinance, here’s what you need to know about small mistakes and your FICO score.
Making Late Payments
The due date on your bills might seem like an advisory, but whether we’re talking about
a student loan, a credit card payment or car loan, late payments can add up. Your payment history constitutes 35% of your total FICO score, which means that even a couple of late payments can have a marked impact on your overall credit. Instead of leaving this to chance, set aside a day each month before your bills are due to ensure they’re all paid off. With that said, only a 30 day late payment will negatively impact your credit score.
Applying For New Credit
It’s often the case that a store will offer special deals if you sign up for their own in-house credit card, but this can cost you big since the amounts you owe make up 30% of your credit score. Also, because lenders will often assume that you’ve run out of credit if you apply for a new card, applying for new credit can be a red mark against your FICO score. It’s also important to realize that closing off an old, unused credit card can actually bump up your balance so you may want to keep them active temporarily. The ideal credit mix is 2 revolving and 2 installment accounts.
Forgetting Credit Altogether
It might seem like the best possible option for avoiding credit issues is to avoid using credit altogether, but your credit history constitutes 15% of your FICO score. This means that you should have at least one credit card in your possession so that you can use it to build a history of lending success. While you won’t want to use more than 30% of your credit limit, it’s important to show proven experience in paying back your lenders.
Many people think that bad credit is the result of overspending and huge debt amounts, but your FICO score is largely determined by your payment history and your available credit. If you’re trying to improve your financial outlook in preparation for buying a home, contact one of our mortgage professionals for more information. Click Here for a FREE Pre-Approval
Balance-to-Limit-Ratio on Revolving Accounts
Revolving accounts are essentially credit cards because the balance and payments can be constantly “revolving” and different from month to month. Unlike an installment credit account which is a loan with a predetermined payment and payment schedule (i.e. mortgage, auto loan, personal loan, etc.). The balance to limit ratio is the representation of the balance you are carrying in relation to the limit. For example if you have a credit card with a $1000 limit and your balance is $500 then your ratio is 50%. You want to avoid carrying a balance over 50% of the limit but it’s even better if you can maintain a balance-to-limit-ratio of less than 30%. Maxed out cards could will negatively impact your score. Obviously if you can pay off your balance in full every month that would be the ideal but if its not possible do you best to get it below 50% or even better 30% balance to limit ratio. Paying down revolving debt can be the best and fastest way to improve your credit score. Make sure if you payoff a credit card that you do NOT close the account.
Credit Restoration / Credit Repair
Its imperative that you if you decide to use a credit repair or credit restoration company that you do your research because there are a lot of unscrupulous companies out there so it’s always best to get a referral. Whether it be from a friend (who’s actually used the service), mortgage professional or real estate agent. Mortgage pros and real estate agents have a financial stake in your success of a credit repair program so want to refer you to a credit repair company they know is not only reputable but also successful in helping clients restore/repair their credit. They also don’t want to jeopardize their professional reputation by referring a company who is not legitimately looking out for your best interests.
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