How to Avoid the Five Biggest Credit MistakesBrought to you by Glenn KellerImagine spending more than $350,000 than someone else for a loan just because your credit score wasn’t as high as theirs. Unfortunately, it happens every day. Consumers sometimes feel like they get backed into a corner to pay more because their credit score falls within a range that is not high enough to qualify for the best loans. Here are some examples of what you could pay for a $300,000 loan if you had the following credit scores:
The table shows that if your credit score is under 720, you could pay as much as $988 more per month for your mortgage payment. That works out to an additional $11,856 a year and a massive $355,779 over the life of the loan. Wouldn't you rather put that money towards retirement, or improving your overall situation in the way of lifestyle, investing or education? $350,000 is a lot of money. It is enough money to change your life for the better, and it's worth fighting for. Even if your credit score is on the low side today, you don't have to give up on your dream of homeownership. Bretlin Home Mortgage of Floridahas several options that will allow you to get into a loan today, then spend the next 6 to 12 months working to improve your scores, and then refinance for a better interest rate once your credit scores are higher. Your mortgage professional at Bretlin Home Mortgage of Florida can assist you in this important process. Then, we can show you how to take proactive steps to improve your credit score so get the best loan possible. As you can see, there are 355,779 good reasons to get started right now! The purpose of this article is aimed at showing you how to do just that.
Background facts you should know: Here are a few quick facts to get you started on your credit awareness and improvement campaign: A "Good" Credit Score: Credit scores generally range anywhere between 350 and 850. A 720 score or higher is considered "Excellent" credit. Credit Scores from the three credit bureaus are all a little different: The three major credit bureaus, Equifax, Experian and TransUnion are businesses that make money by collecting data from creditors about YOU and then reselling the data to employers, lenders, insurance companies and utility companies. It’s common that the data they store in your file will be different because not all creditors report to all three credit bureaus. That explains the variance in your scores as each line item affects the score either higher or lower. Many Different Scores: Since the different types of companies mentioned above analyze the data with an eye toward their own unique interests, emphasizing different aspects of the credit score and credit history, your score can be very different to different types of companies. For example, if you apply for a car loan, the lender will analyze the data with an eye toward your vehicle payment history. A mortgage lender will heavily weight your history of mortgage payments, or even rent payments. Lenders DO NOT buy their credit scores directly from the credit bureaus, but rather take only the DATA from each credit bureau, enter it into their own scoring software and then calculate their own credit scores based on the criteria they feel better evaluates whether or not you will be a good credit risk for their program. In essence, all lenders calculate your credit scores using the same data from the three credit bureaus, but all lenders DO NOT use the same software to evaluate and score that data. The potential for varying scores is high. You want to make sure you properly manage your credit history to ensure that your scores are favorable under all scoring software models. Credit Scoring Factors: There are only five factors that make up your credit score, and each factor weighs differently on your score. Here is the breakdown:
How to Avoid the Five Biggest Credit Mistakes Now that you have knowledge of how the credit system works, let’s look at some of the most common mistakes consumers make regarding their credit scores and how you can avoid them: Mistake Number 1: Neglecting Your Credit Scores You’ve heard the saying, “Life happens.” We all get busy with our daily routines. Family, work, managing a household, recreation, etc., they all seem to take up more time than we think they will, and none of us seems to have enough time in the day to get everything done. As a result, most consumers do not monitor their credit actively. When it comes time to apply for a loan, they are not credit ready, and that's a shame because, as I mentioned earlier, a low credit score can be financially devastating, or even worse, may cause the loan to be denied altogether. Here are a few facts that will help you understand why it is so important to monitor your credit. In the last 90 days:
Ensuring that your credit reports are accurate and reflective of your activity will help you maintain a good credit score and will also help you avoid attempts of identity theft. The first step is to have a complete picture of your current credit situation by ordering your credit reports and scores from all three national credit bureaus, Equifax, Experian, and TransUnion. You should get your score from all three bureaus for two reasons: First, each bureau may have slightly different information about you depending on which companies report to them on your accounts. Second, many lenders, especially mortgage lenders, look at all three of your FICO scores to determine whether to grant credit – for everything from a home loan to a car loan to a cell phone. It is not recommended that you have a creditor pull your credit reports because you will lose points for a hard inquiry. As an alternative, you can receive one free copy of your report each year from every bureau by requesting it. This request gives you access to your credit history, but not your credit score. You will have to pay a fee for each score through this service. Because we strongly advise you to access your credit reports and scores on a quarterly basis, we recommend that you go to www.privacyguard.com where you can pull all three credit reports & scores for only $1.00. Privacy Guard’s credit watch program allows consumers to pull their updated credit reports and scores every 30 days, which is critical to your credit maintenance. (Be sure to read the terms and conditions of the Privacy Guard Agreement.) Mistake Number 2: Late Payments Making a late payment is a big “no-no” if you want to achieve and maintain a good credit score. Most consumers have no idea how much a 30 day late payment can affect their credit score. According to Fair Isaac & Co., the creator of the credit scoring system, just one 30-day late payment can cost you 50-75 points immediately, even if you have a 720 credit score, and it takes months, sometimes even years, to gain back those 75 points. The credit scoring system doesn’t care why you are late with your payments. It could be due to a medical crisis, a loss of job, you were out of town; it really doesn't matter. It is assumed that you are now a high risk borrower and your credit score will immediately reflect the penalty. Regardless of whether or not you have money in the bank and plenty of unused credit, your payment history indicates how much control you seize to properly manage your situation and the level of responsibility and care you exercise to maintain your existing accounts. Since your payment history is the largest consideration in your credit report and score, you want to make sure that you pay all your bills on time. Mistake Number 3: Going Over 50% of Your Credit Limit Consumers tend to use credit cards for all kinds of needs, which can lead to large balances. It is important to keep credit card balances below 50% of the available limit at all times to maintain your credit score. The rules are even tighter if you are looking to get a loan. For the 3-6 month period prior to applying for a loan, keep those balances below 30% or less of your limit so you can increase your scores as much as possible--the lower the balance, the better. Never max out or go over your credit limit! Fair Isaac & Co. says that you can lose up to 80 points by maxing out a credit card, even if you pay the balance down, you only get 40 of those points back immediately. It will take several months before you get the other 40 points back. If you have to max out a credit card to make a purchase, make sure to pay the balance down BEFORE the statement date so that the maxed out balance does not get reported to the bureaus. If you cannot pay down your credit card balances to 30% of the available limit before applying for a loan, try calling your credit card companies and ask for a temporary limit increase without pulling your credit. Let them know you are in the process of purchasing a home and that your balance is affecting your credit score. Some creditors will oblige if you have maintained a good payment history on the account. This aspect of your credit score is part of the Amounts Owed factor which accounts for 30% of your credit scores. Mistake Number 4: Shop ‘til Your Score Drops Shopping for various loans can be a fast way to drop you credit score. Why? Because when you apply for a loan, they pull your credit. This is a hard inquiry that automatically takes off anywhere from 2-30 points off your credit score. The good news is that Fair Isaac realized that consumer's should not be penalized for something as logical as shopping around before buying a car or home, so they came up with something called De-Duplication. What it says is consumers can have their credit pulled by as many mortgage or auto lenders as they want within a 14 day period, and it will only be counted as one hard inquiry against their credit score. And even better news is that the new scoring model released by FICO has expanded the 14-day period to 45 days. Note: Not all lenders are using the new model yet, so it is best to be safe and do your shopping in a 14-day period. Mistake Number 5: Opening Accounts You Don’t Need Just say “Thanks, but no thanks” when it comes to new offers for credit. Don’t open accounts you don't need. Just because credit is offered, does not mean that you should accept it. When you receive one of those pre-approved credit card letters in the mail, your credit has not been pulled yet, so you are NOT approved for the account. Once you pick up the phone to call the creditor, they will pull your credit report and you will be penalized immediately for the hard inquiry. Remember, one hard inquiry can cost you anywhere from 2-30+ points to your score, depending on other elements in your credit report. And, the lower your credit score, the more points you will be penalized so it is best to avoid these types of special offer credit cards (including Department Store offers of "Open an account today to save 15% off of your purchase.") The scoring system frowns upon 3rd party finance cards. 4 Steps to Start Improving Your Score You don’t have to just take bad credit lying down. Here are four steps to help you get started today:
In Conclusion: Your good credit is well worth the effort it takes to both achieve it and preserve it. If you have good credit, keep it that way. In doing so, you will continue to enable yourself to enjoy the best loans with the best interest rates. If you are seeking to improve your credit, understand that your efforts will be paid off in spades. For the first half of this year, my monthly newsletters have offered an in-depth analysis of each of the five factors that make up your all-important credit score. Each issue covers the elements of each factor, what to look for and how to improve every aspect of those factors. These 6 newsletters offer a complete and comprehensive education for all consumers who seek to gain the ultimate financial advantage by gaining in-depth credit education. Remember, with your good credit, the brightest financial future awaits you!
Bretlin
www.bretlinfloridamortgage.com Contact us 1-800-572-5964 info@bretlinfloridamortgage.com
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