Credit score plays a very important role in your home shopping experience. A credit score is a number that represents your credit risk. Lenders use this to determine whether to issue the loan and the rate they offer is based on this number. You can obtain a copy of your credit report for free annually at annualcreditreport.com. Review the report to make sure that all the info displayed is accurate and make corrections if any errors are found. The report does not provide credit scores, however, you can contact either one of the three credit bureaus (Experian, Equifax, TransUnion) directly to obtain a score.
The higher score you have, the better position you are in when obtaining a new loan. Here are some ideas to maintain your high scores.
- Credit utilization (keep below 33% of the limit recommended): How much credit one uses on the monthly basis is what credit bureaus use to evaluate the credit score. Credit bureaus sum up all types of credit limits. The credit score is determined depending on the percentage of usage on the monthly basis as a whole.
- Don’t close unused credit cards: Since credit bureaus add up all the credit limits to determine how much credit one uses monthly basis, keeping some credit cards with history will be helpful to keep the total used percentage credit lower. It is okay to keep “manageable” credit cards. Typically, we can manage from 3 – 5 credit cards, used and unused ones.
- Don’t open credit you won’t use: Although credit bureaus sum up all the credit limits to see how much credit one use on the monthly basis, opening a new credit card will have short length of history (15%) and new credit (10%) which doesn’t help the credit score. Often we see the credit card with 0% introductory rate for a period or 10% off from the 1st purchase in the department store. If we take the offer, the credit history is short and it’s a new credit.
- Maximizing credit each month, even if paid in full, can lower your score: Credit bureaus have information on whether the payment is received on time. If the credit limit is maxed out (30%), the credit score will be lower even if you paid it in full in the month end.
- Rate shop within 30 days = 1 inquiry: Many clients would like to shop the interest rates for purchasing or refinancing. Multiple inquiries within a 30 day period by different mortgage brokers or lenders can lower the score. As the result, the interest rates may not be better during the shopping process.
- Collections stay on the credit report for 7 years: If there’s any collections or a charge off occurred, the charges/collections will stay on the credit report as long as 7 years regardless whether they are paid or not.
More tips to come. Tune in next week to find out the next steps! Or contact me today at 925-216-3618 for more information
