Credit can make or break a deal or make achieving the goal of home ownership more or less challenging. A person with good credit is more likely able to buy a home than one with bad credit.
There are several credit bureaus – Experian, Transunion, and Equifax are the major players – and each has their own version of a credit score, each weighing different factors in debt payment history a little differently. But FICO scores are the most important score of all – these are scores used by lenders (particularly mortgage lenders) to determine credit worthiness. A FICO score may often be 10-40 points different than a score from one of the other credit bureaus.
FICO – which stands for Fair Isaac Corporation, the company that originated a math and statistics based credit scoring model – is based upon a “paid as agreed” concept. If you pay your debt as agreed, your score goes up; conversely, if you don’t pay as agreed, your score goes down. The purpose of a FICO score is to predict the likelihood of a 90-day default within the next 24 months, based upon past behavior.
- Having money does not equate to having good credit
- Having debt doesn’t mean you have bad credit
Good credit is the result of having reasonable credit limits and debt usage for your income and paying your debts on time all the time. (In fact, no credit history also leads to poor scores.) I have worked with clients who were very wealthy, but with several late, disputed or “slow” pays that put their credit score below 740 and thus limited their loan options. Conversely I have worked with clients with more limited resources but excellent 800+ credit scores because they had reasonable debt and always paid on time – they ended up with more loan options and a better rate than the wealthy clients!
Having good credit pays off! For a person or couple with a score less than 600, it’s highly unlikely a home purchase is possible. At 600-640, it’s possible, but the interest rate will be higher and loan options limited. With scores in the 640-740, better rates and more options become available. With scores over 740, a borrower is generally eligible for the most loan options and best rates, which can mean a more expensive house is affordable or paying less each month (and over the life of the loan) than someone else with the same loan amount but lower score.
- Pay on time, all the time.
- A single 90-day late payment or collection can push your score below 740
- A single 30-day late payment can cost 40-60 points in your score
- Set Up Automatic Payments So You Never Miss a Payment
- Setting up all your credit accounts to be paid automatically from your primary banking account is a great way to make sure you never miss or have a late payment on your regular bills.
- If you can’t set up a bill for automatic payments, look for options that allow for an automatic email or text alert to remind you when the bills are due, or put a reminder on your phone or calendar.
- Monitor Automatic Bill Payments and Subscriptions
- We tend to forget about recurring charges to a debit card or automatic withdrawals from a checking account. These could be for subscriptions, memberships or services we’ve forgotten about or no longer use. Some may be the result of “auto-renewal” policies that automatically extend services indefinitely. One easy way to get these kind of expenses under control is to visit Trim, a free service to help identify and cancel unwanted subscriptions.
- If you have a dispute with a lender or creditor, better to pay first, then work it out. This usually prevents damage to a credit score.
- Dollar amounts related to derogatory items don’t matter! It doesn’t matter if you are late by $1 or $1,000,000, because FICO reflects your ability to “pay as agreed”.
- New accounts temporarily lower scores. (This is why mortgage lenders don’t like you buying anything big before closing!)
- Everyone can get a free credit report each year from each of the three primary credit bureaus using annualcreditreport.com.
- These reports will not include a FICO score, but do provide details as to what’s in one’s report. Reviewing the details can help you determine if you have a “derogatory” credit instances that require action to correct or if your credit history is positive.
- Be smart about your credit regardless of your marriage status!
- If you are getting married, discuss credit scores and history with your soon-to-be spouse.
- If you are married, make a “date” with your spouse to check your credit once a year.
- If you are getting divorced, check your credit every 3-4 months or more and take quick action to separate your credit from your soon-to-be ex-spouse’s.
- If you are single, look out for yourself and your financial goals.
The bottom line is that credit is critical to your financial success.
Monitoring and building your credit through practicing smart money management is a habit that really pays off – especially if your plans include owning a home. If you are considering buying a new home, or refinancing the home you’re in, contact me to review loan options that fit your credit score.