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Decoding credit scores for maximum mortgage savings

Posted: August 12th, 2016 | Ask Kathy, Columns, Featured | No Comments

By Kathy McSherry

Hi Kathy:

I have been renting for the past two years in Mission Valley and I have saved enough money for what I think is a reasonable down payment for a small condominium that I would qualify for. I have been told that the better my credit, the better interest rates that would be offered to me from a potential lender. I think my credit is somewhere around 705. Is it true that if my score were to raise to 740 or better, I would be eligible for the best interest rates? If so, what can I do to raise my credit score?

—Sage H.

Hi Sage:

You are definitely not alone when it comes to understanding one’s credit or FICO score. Basically, your credit score is a complex formula that projects the probability of a person being 90 days late or more on any given account. According to FICO.com, there are five categories that can determine your FICO score:

Payment history accounts for 35 percent; amounts owed accounts for 30 percent; length of credit history or average age of your credit file accounts for 15 percent; new credit accounts for 10 percent; and the types of credit used accounts for about 10 percent.

The numbers below are how FICO views your score:

  • 800 – 850: Incredibly Good
  • 750 – 799: Excellent
  • 700 – 749: Really Good
  • 650 – 699: Good/Average
  • 600 – 649: Fair
  • 550 – 599: Poor
  • 500 – 549: Very Poor
  • 300 – 499: Exceedingly Poor

As you can see, 740 is considered really good. Assuming you are referring to a conventional loan with 20 percent as a down payment, a score of 740 or above will get you the best interest rates.

Credit-Score-MeterAccording to Frank Kriticos, credit expert at San Diego Credit Solutions, here are some tips you can do right now:

Check your credit report. Get a free copy and really scrutinize it. Check for past and current addresses and any creditor that is showing. Check its history and accuracy. Dispute any item that is incorrect.

  • Set up payment reminders so that you are on time.
  • Reduce the amount of debt you owe.
  • Pay your bills on time.
  • If you have missed payments, get current and stay current.
  • Be aware that paying off an account will not remove it from your report.
  • Keep balances low because high outstanding debt can lower your score.
  • Don’t open a number of new credit cards that you don’t need in order to increase your available credit.
  • Do your rate shopping for a give loan, when they have to pull credit, within a given time. FICO distinguishes between a search for a single loan and a search for many, in part by the length of time over which the inquiries will occur.
  • Re-establish your credit if you have had problems.
  • Apply for credit only as needed.
  • Have credit cards but manage them responsibly.
  • Enlist in the aid of a professional credit expert.

Depending on your score, here are some reasons your score can be lowered:

  • Maxing out a credit card – could move your score down 10 – 45 points.
  • 30-day late payment – could move your score down 60 -110 points.
  • Debt settlement – could move your score down 45 – 125 points.
  • Foreclosure – could move your score down 85 – 160 points.
  • Bankruptcy – could move your score down 130 – 240 points.

Many people do not fully understand the impact that one’s credit can have on them until they need it. It is unfortunate that credit is not taught in our school’s curriculums. Balancing a check book, healthy credit card use, avoiding the debt cycle, filing one’s taxes and financial planning should be required before people leave for college; and not a big question mark as to what to do next when they enter our workforce, start looking to rent, and apply for a car loan. We tend to focus on the degree and not saving for the future. Money coaching would make a huge difference to our workforce if our young ones could learn financial competence before entering it.

Sage, the benefits of a strong healthy credit will be with you for a lifetime. If you ever need to borrow money for a home, a business and/or personal reasons, people are always going to defer to your credit. Taking the time now, to check its status and fix any inaccuracies, could save you possible headaches and disappointments in the future.

As Sir Walter Scott famously said: “Credit is like a looking-glass, which when once sullied by a breath, may be wiped clear again; but if once cracked can never be repaired.”

For more advice on credit, Frank Kriticos can be reached at sandiegocreditsolutions.com or 619-916-3999.

—Kathy McSherry is a veteran Realtor in Mission Valley with Caldwell Banker West. Email your questions to askkathy@outlook.com.

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