By Chris Moore
Senior Mortgage Consultant
STONEGATE MORTGAGE
(317) 847-4738
If you pay cash for everything, your credit or FICO score is not very important at all. However, if you, like most Americans, need to buy insurance, purchase a home or buy a car, then it is probably one of your most valuable assets.
There are three major credit reporting agencies: TRANS UNION, EQUIFAX and EXPERIAN. These companies collect data from credit providers on how well people like you pay their bills. The data also show how long you have had the account, how much you owe, and how much credit is available to you. The agencies pull this information and analyze it to compile a credit score number for you. This number is one you should not only know but also guard with your life. This score determines how risky it is for a company to provide you with credit. The lower your score, the higher your interest rate. This means not only a higher monthly payment but also a much larger total cost of the item you are buying.
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RATE |
PAYMENT |
TOTAL COST |
Smith |
6% |
$959.28 |
$345,340 |
Jones |
8% |
$1,174.02 |
$422,647 |
Having bad credit costs the Jones Family $214.74 per month, $2,576.88 per year and over $77,307 for the life of the 30 year loan, for the same house. What can we learn from this example?
1) If you want to buy a home in the future, find a lender who will pull a credit report from all 3 bureaus and will help you resolve any inaccuracy that may be found. A good loan officer will also be able to give you advice on how to improve your score. Here are a few numbers that will help you understand why it is so important to monitor your credit report.
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- Over 10 million Americans have been victims of Identity Theft.
- 80% of all consumer credit reports contain errors that drop your credit scores from 5 - 100 points.
The credit report company I use has information on the last page of the report that tells me how to get a better score within 72 hours. In our above example it would have said, "Show proof of collection paid and increase score by 20 points." This is a powerful tool that very few Mortgage companies use. The lesson here is to monitor your credit report at least once every year but especially before you even think about looking for a new house.
2) Making payments more than 30 days late is a big no-no. I don't care if you have to take money out of your IRA or get a part time job delivering pizzas. Do not make late payments.
3) Going over 50% of your available credit card line adversely affects your score. My advice: call your credit card companies to increase your available credit, and make suitable payments on your cards to pay them down and eventually off. This should be a high priority for all Americans. The goal here is to get the percentage of available credit on each card below 50%.
4) Close all unused credit cards. Remember your credit score is an indicator of how you use your credit. If you have not used some of your credit cards for a while, close them - IF your available line is below 50% on your other cards. If it is not, see if you can transfer your balance to the unused cards. You should be able to get a better interest rate on a transfer and level out your total balance percentage.
Remember your credit score not only determines how much you will pay for your home, but it will also affect how much the lender will give you. I have worked with borrowers for over 15 years helping them improve their credit and obtaining their dream homes. Please feel free to call me for a free consultation.
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