With the increased number of defaults on credit lines and the economy seemingly headed for an inevitable recession, most lenders are cinching the financial belt tighter than ever. So what does this mean for the average Houston Housing Market consumer? If you are trying to get a loan for anything, your credit had better be in top shape. Loan approvals and the best interest rates are being reserved for those with the best credit scores.
Whereas the lending process was once somewhat of a mystery, most consumers are now privy to the knowledge that credit is a major factor in determining financial leverage when it comes to lenders. Since many lenders and creditors now have direct virtual access to credit scoring agencies, you can now be pre-qualified blazing fast for almost anything – from mortgages to car loans - by answering a few simple questions.
When something makes such a huge impact on you financially, it is only natural to wonder how exactly credit agencies arrive at your final score. Basically, your credit score is the result of a mathematical equation based upon several key pieces of information that help determine financial risk; that is, how risky it is for a creditor to make a loan or open an account for you.
There are three major credit reporting agencies that lenders and creditors rely upon to provide information about your credit score, also known as your FICO (Fair Isaac Corporation) score. The three major credit reporting agencies – Equifax, TransUnion, and Experian – all use a slightly different version of the FICO scoring method to determine your credit score, which is why there is sometimes up to a 50 point or more difference between the credit agencies.
The credit scale ranges from a low of 300 to a high of 850. Most people fall within the 600 to 800 range, and a score of 720 or better will allow you access to the best interest rates on your loans and accounts. So, the higher your credit score, the more likely you are to qualify for a loan or credit account.
There are several key factors that are important in determining your credit score. These factors include how well you pay your bills, how much outstanding debt and available credit you have, the length of your credit history, different types of credit you have, and new credit accounts.
1) How well you pay your bills accounts for a whopping 35 percent of your credit score. While the most emphasis is directed towards your current paying habits, how you have paid in the past is also considered. Having numerous collection accounts on your credit report will obviously detract points. The goal is to pay all your bills on time consistently.
2) The next factor that weighs heavily on your credit score (30 percent) is how much debt you owe and how much credit you have available. All the debt you owe is considered here – from mortgages to car loans to credit cards/accounts. Ideally, each credit line should have no more than 50% of debt to available to each credit line. If you are pushing your credit limits to the max, it could indicate to a prospective lender that you are headed for trouble and may be a poor financial risk.
3) The length of your credit history accounts for 15 percent of your credit score. The longer that you have had credit, especially with the same lenders, the better you will fare in this area.
4) The different types of credit you have available to you accounts for 10 percent of your credit score. So having a mix of credit cards, mortgages, and revolving accounts will work in your favor.
5) The last factor that makes up your credit score (10 percent) is how much recent credit you have applied for and preferably received. It is important not to apply too frequently for new credit lines. At the same time, it is seen favorably for you to apply occasionally for new credit, because it is viewed as you being a savvy consumer who shops around for lower interest rates. If you have had a number of recent late payments, though, applying for new credit could actually negatively impact your score.
It is important to remember that the credit scoring agencies are not always entirely accurate. For this reason, you should check your credit report often for errors. Many people have received credit shocks when applying for a loan or account and then being denied because of erroneous reports.
It is essential to make sure that your credit report is current and up to date at all times. You are allowed one free credit report each year from each credit reporting agency. However, you may also elect to subscribe to one of the numerous low cost credit monitoring agencies available online. The main point, though, is that you actually monitor and cultivate your good credit on a regular basis. Just like a beautiful garden, it grows with the proper nourishment and attention.
August 10th, 2008 at 12:47 am
My Mortgage is due on the 1st of each month. There is a 14 day grace period and I have an auto payment set up for the 4th of each month. Does the payment on the 4th show up on a credit report as a late payment?
August 10th, 2008 at 7:50 am
Hi Michael,
Thank you for your question. The answer is no. You can pay anytime within the 14 day grace period without paying a penalty or being concerned about a negative entry on your credit history. In fact most lenders will not report a late payment to the credit bureau until it is 30 days or more late.