I often hear buyers talk about their credit score, good or bad, and there is a lot of misconception about what effects them, how to raise them, how accurate they are…
Mark Kimmerling, Senior Loan Officer with MSI (NMLS # 168784) shares with us an overview of credit scores, what effects them, and how to prepare for your home purchase.
“A borrowers credit score (history) has a major impact in determining a borrower’s ability to repay, along with, determining interest rate and mortgage insurance premium amounts. Credit scores can vary depending on the type of credit you are applying for or if you are viewing your score for personal use. The three major credit reporting agencies (Equifax, Transunion, Experian) also have models that vary which will give different scores.
There are a number of factors that go into the credit scoring with some being more impactful than others. From my experience, I will share some of the factors that I have seen to be the most impactful.
1) Payment history – Payments that are 30 days late or longer tend to have a very negative impact on credit scores. Furthermore, the more recent the late payment or derogatory credit (charge offs, bankruptcy’s, collections, etc.) the harder hit the scores are. The further in the past the late payments are the less the scores are affected.
2) Credit utilization – I find credit cards and the utilization of those cards very important in scoring models. Below are areas that the use of those cards can impact scores.
- Limits to availability. If a borrowers has only 1 card and is at 90% of the card limit, this may negatively impact the scores. I suggest keeping the credit utilization at approximately 30% or lower.
- Length of time accounts are open. If a borrower has a credit card that they have had for 48 months in good standing it will have more positive impact vs. a brand new credit card only open for a couple of months. Closing out old cards may also have a negative impact due to the loss of the cumulative limits to availability. For example, you have 2 open credit cards with $5,000 limit each and have a balance on one of those cards at $2,500. In this scenario, you would have a total limit of $10,000 and a utilization of $2,500 putting you at 25% utilization of your limits. If you were to close out the card you are not using, you would instantly increase your utilization to 50%.
3) Credit mix – Having a variety of credit is also helpful. Credit cards, installment loans, mortgage, retail cards are some of the different types of credit that carry different profile. If a borrower only has retail credit cards the scoring may be different than a borrower with major credit cards in the mix.
Navigating and understanding credit scoring can be difficult and often times frustrating. If you are planning on buying a home within the next 12 months or even further out I suggest obtaining your free annual credit report to know where you stand prior starting your search. If there are questions or improvements can be made in advance you will better chance of making adjustments that can save you a lot of money down the road and any potential disappointment down the road.”
Have questions? Talk more with Mark here!