How To Fix Your Credit in 3 Easy Steps: by Rebecca Howard
Quite often I begin to work with a perspective home-buyer and very quickly we have to address the matter of how they will purchase the home. For most home-buyers, borrowing is an essential requirement, as many do not have sufficient ‘cash’ funds on hand to make a home purchase. They may experience long time employment, long-term residency, or even a good cash down payment, but the one thing that makes the final determination when they decide to apply for a mortgage, is their credit scores. So how does one bridge the gap between unacceptably low credit scores to the ultimate goal of a home purchase? That’s the question I hope to answer with this post.
Understanding the Basic Components of FICO Credit Scores
Understanding the basic components of FICO credit scores and how it works is quite simple. All one has to do is search the Internet and answers can be found. IMHO: it does not require hiring a credit repair service to get ones’ credit in line. The money spent or used to pay a credit repair company can better be used towards paying bills. Honestly. So this is a good place to start to using your head and your hard-earned money by getting it together.
From personal research, I learned the five (5) critical factors that affect credit. Here’s the breakdown:
- Payment History – 35%
- Credit Utilization – 30%
- Length of Credit History – 15%
- New Credit – 10%
- Credit Mix – 10%
Easy right? Really it is that easy… but it’s equally important to understand how the factors relate to each other. I won’t even comment on the need to pay your bills on time…that’s a given and has the biggest impact on your score. Let me simplify.
- If you have 5 credit cards and use them all or just one; if the combined balances is over 30% usage, you are very likely to get dinged on your credit. So the goal is to lower any and all balances to under 30%. The reason is that 30% 0f your score is based on utilization. Get it?
- Using the same example, if you are late on just one credit card, you’re likely to get dinged because being late on any one account has the same effect as being late on all of them.
- Again, regarding the age of the account(s), there is less impact (10%) even if all your credit card accounts are relatively new.
Common Credit Mistakes and How to Avoid Making Them
Right here Id like to reference an article that helps explain how common mistakes can affect your FICO scores. Basically it all comes to these simple steps: pay all your bills on time, keep all credit card balances low and take on new debt sparingly.
My advice: read and reread this article until you understand the process clearly. Take the time to get your scores up to an acceptable level (680-720) and avoid impulsive buying; like financing a new car or a home theater or new home furnishings or co-signing for someone else before and during the application process. Your lender will have more to say about that I’m sure.
Get your credit in shape. You can do this within 12-24 months. You will be proud of your accomplishments. And when you’re ready to buy your home, get in touch with me and we can get you situated right away.