You can’t have good credit unless you have debt. Sound like an oxymoron? It always has to me, but nevertheless it is a fact. As a Realtor, I am often in the position of raising awareness about repairing credit and even the importance of how the system works and what your current score is.
I can’t tell you how many times I’ve had people who have a 20% down payment on hand (in their mattress) but have no credit and are shocked when they can’t get a mortgage. Then there are those who have 15 different credit cards, bankruptcies, or repossessions, who are also amazed when they have their credit pulled and find it is rated poorly and they’re unable to secure a mortgage.
You should always know your credit score. Not only does it give you a sense of accomplishment when you see it go higher, but it will also alert you if something is happening that you’re not aware of, such as identity theft or erroneous reporting. There are various companies online that will allow you to check your score and some credit card companies also offer it.
Just be sure you’re looking at your FICO score; as this is what the majority of lenders/creditors will be looking at. FICO stands for Fair Isaac Corporation which created the system back in 1960. In order to even have a FICO score, you have to have an account of some type, whether revolving (credit card) or a set monthly installment (car loan) and it needs to have been reported to the credit bureau for at least six months.
People are often under the impression that paying off a card is a good way to raise your credit score – – Nope! Or that they should close an account to raise it – – No Sir! Paying down a credit card and maintaining it to around a 30% balance will raise your score more than paying it off. Also, the longer an account is open, the longer your history is and that is also advantageous.
It does not have to be a mystery. Keep in mind these simple steps:
- Paying your credit accounts on time has the more significant impact on your credit score.
- Don’t use more than 30% of your available credit on any one card – if you do, be sure to pay it down to that 30% at the end of that billing month.
- Don’t close out all your old accounts. Having an account open for a long period of time scores you credit score benefits.
- Use more than one type of credit, combining installment and revolving. Be sure you don’t get carried away. If you can’t pay it off in 30 days (revolving) you probably shouldn’t purchase it.
Most lenders require a credit score of 640 in order to purchase a home; though there are a few who have programs for scores less than that. It is pretty amazing though, because at 640 you’re only in the “Poor” rating for credit. If you want to secure a lower interest rate on a home, increasing your credit score is a great way to do that.
A simple way to look at it is this: Bad = 550 & below/ Poor 550-649/ Fair 650-699/ Good 700-749/Excellent 750+
If you have questions about mortgages and/or credit scores, please feel free to contact me. I work with some great lenders who are willing to help you raise that credit score and create a plan specifically for you. Purchasing a house is a great investment. Don’t get sidelined because of a surprise or non-existent credit score.