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What makes up a Credit Score?

If you are looking to buy a home and you are planning on getting a mortgage you know how important a good credit score is.  It used to be a score of 580 was enough to get a loan.  Then the minimum moved up the 620.  At many lenders it is now up to 640 and there is talk of moving the minimum score to 660.  Why?  Mainly because the Credit Score is a good indicator of the likelyhood of the mortgage being paid back according to the terms of the loan.  So what makes up a credit score and what can you do to make sure your score is as high as possible?

35% of the Credit Score is based on your Payment History.  Do you pay your bills on time, every time?  Do you have any late payments that show up on your credit report?  Do you have any charge off’s, Bankruptcies or Mortgage Defaults?  If you do, it will take some time to  improve your score.  The best thing to do is PYBOT!  Pay Your Bills On Time.

30% is based on Outstanding Debt.  How much debt do you have.  How much do you owe as compared to how much credit do you have available?  For example if you have three credit cards all with a $1000 limit, you have $3,000 in available credit.  You only want to use no more than 25% of the available credit so in this case you can have a total outstanding balance of $750 but it needs to be evenly distributed between the three cards ($250 each) if possible.  That way all three of your credit lines are under the 25% of available credit number.

15% of the Score is on the Length of time you have had credit.  If you don’t have credit card companies offering you cards.  It can be hard to start getting credit.  The first place can be get a savings account and checking account at a bank or credit union and after the accounts are established, see if the bank or CU will give you a credit card.  Even a secured credit card is a start.  Then work up to a small loan and eventually a major credit card.  But remember PYBOT!  Do not open these lines of credit and think you can pay them when it’s easy.  You pay them every month like clockwork.

10% is based on New Credit.  It makes bankers nervous if you are opening new accounts all the time so get three credit lines open and pay them on time and don’t open any more.  Store cards are really being pushed again.  How many department stores now offer you a discount on your purchase if you open their store card.  That’s fine if you’re not trying to improve you credit but if you are, resist the temptation.  It’s only one more card you have to watch, make sure you don’t exceed 25% of the limit and remember to pay it every month on time.  .

The last 10% is on how many types of credit have you used in the past.  Have you made an installment loan in your history (bought a car).  Do you have revolving credit like store cards and credit cards?  Have you ever had a mortgage?

It is really easy to have your credit score drop and it drops very fast.  It is very slow to come back.  It takes a lot of time and a lot of discipline but a high credit score get’s you better rates on a car loan, and even lower insurance rates.  Like it or not It’s Important!.

 

 

About Tom Greenawalt

Tom is a Licensed Builder in the State of Florida. He has been in the construction industry for 35 years building new homes in Pittsburgh, Washington DC, and Chicago before moving to Central Florida. The majority of Tom's career has on detached housing for entry level and first time move up buyers. He was with Maronda Homes for over 15 years.

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