Now more than ever. Do you know your score? If you buy a house now, will you be amoung the many who will be paying points under the new Fannie and Freddie FICO score adjustments?
You just might. In fact, if you are an average Atlanta resident, then you will be paying .75% discount to get the going rate on your new home. That’s because the average credit score in Georgia is 676. And that is just below the 680 cutoff for not paying points on a conforming loan.
676 is also below the national average. Just to know where Georgia ranks.
What’s more, the lower the credit score, the more points consumers will pay. And, FHA is even getting into the “risk-based pricing” of loans act, by charging a higher up-front and monthly mortgage insurance premium (read: PMI) for borrowers with lower credit scores.
A Quick Primer
Credit Scores range from 350-850. The higher the score, the better. Because the higher the score, the lower you are as a credit risk.
So, what factors make up a credit score? Simple.
As you can see:
35% of your score depends on Payment History, or how timely you make your payments. Going 90 days late will hurt your score more than going 30 days late. Likewise, being late on a large payment, such as a car loan, will hurt your score more than being late on the minimum payment on a Home Depot card.
And, one BIG mistake people make when trying to rectify their credit is paying off that two year old account that went to collection. You see, that is a negative account now, because it is in collection. Only there has been no activity on the account for 2 years, so the effect on the credit score has been minimized. By paying it off you are making a negative account rebound with current activity, and your credit score will drop significantly. There are ways and times to pay those off, but especially if you are about to apply for a home loan, let’s talk strategy before you send a check in to the collector.
30% of your score depends on the Amount Owed relative to credit lines. If you have 3 credit cards, for example, and each has a balance of less than 30% of the available credit, then you are in an optimal position to have the highest score possible. The next levels that will begin to hurt your credit scores are:
> 30% and < 50% of the available credit line – this will hurt your score
> 50% and < 70% of the available credit line is owed – this will hurt your score more
> 70% of the available credit line is owed – this will greatly harm your credit score
and
> 100% of your available credit, in other words, you are over your limit – this will destroy your score.
Tips in this section: If even one card falls into a category above, your score will be negatively affected. So, if you are applying for a home loan and you have one card maxed, but 3 others with zero balance, you will do well to spread the love and make sure each card is under 30% of the available credit. And, often times a Home Equity Line of Credit (HELOC) is reported falsely as a credit card. That is an easy fix, but if you are maxed on it, it will hurt your score until we fix how it is being reported to the credit bureaus.
Next up, 15% of your credit score is Length of Credit History. Not much you can do about that if you are just out of college and are getting your first bit of credit, except begin and wait.
However, the common mistake is to consolidate credit card debt on one new, 0% interest for six month card, and close the others that you may have had open for years. Your score will suffer. Better to lock the other cards away, but leave them open for some time.
Then, 10% of your credit score comes from New Credit, read, Inquiries. In my experience people worry much more about Inquiries than most of the other items influencing their credit score – when it is only 10%.
Tip: If you are shopping for like items – a car loan or a home loan – you are afforded a 14 day window in which multiple credit inquiries from the car loan companies or the mortgage companies are all viewed and scored by the credit agencies as one inquiry. So, decide you want that new home, and find the loan quickly. Then, enjoy the home and maintain your score.
Alternatively, if you just got a raise at work and go on a weekend shopping spree to celebrate, and started with a new car with a nice new car loan, then went to various stores and took advantage of the offer, “Would you like to save 10% off your purchase today by opening a … Macy’s, Kohl’s, Target, Dillard’s, Victoria’s Secret… account?”
You would return home with a bunch of stuff you will forget about, feeling good about all the money you “saved”; and your credit score will suffer, in the short term.
Finally, another 10% of your credit score is determined by Types of Credit. A mix of a mortgage, 3-5 major credit cards, a car loan, etc. will score higher than a single type of credit.
Certainly there is a lot more detail to explore when talking about credit scores; but this is the 50,000 foot view. Oh, and one more thing. Remember that the credit scoring models are simply computer models. They have no memory. So a change for the better today will have an effect on the score today. With the right moves, it is possible to raise the score by 20, 50, 70 or 100 points in a week. I’ve seen it many times.
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