How to Use Your Credit Well
Did you know October 17 is National Get Smart About Your Credit Day? Although we aren’t credit experts*, we do know a thing or two about how to use your credit well, especially when it comes to getting a home loan.
It’s never too early (or too late) to start thinking about ways to improve your credit and keep it in the green!
Improve Your Score
Know what you owe
You’re eligible to obtain your credit report for free every year at AnnualCreditReport.com. Federal law gives you the right to one free credit report per year from each of the three reporting agencies. To make the most of the three reports, you can spread them out over the year. This helps you to see your reports at intervals that will keep you informed as to changes or updates you’ve made since the last report.
Each time you get a report, review it in detail to ensure everything is accurate and actually belongs to you. If you find any mistakes, you can dispute them. Errors are more common than you’d think, so this is definitely a worthwhile use of your time
Know what’s important to your score
There are five factors involved with calculating your credit score:
- Payment history
- Credit utilization
- Length of credit history
- How much new credit you have
- What types of credit you have
The most important factor in your credit score is payment history (35% of your score.)
Learn HOW to boost your score
If you’re looking to add some points to your score, the most common area that’s overlooked is the credit mix. This scoring factor is worth about 15 percent of your overall score and can make a difference.
Credit mix is the variety of accounts you have. A mix of installment and revolving debt is ideal. Installment debt is something with a fixed payment and a balance that goes down upon each payment, such as a car loan, furniture loan, or most mortgage accounts.
Revolving debt is debt where the balance can increase or decrease, and there is a minimum payment option, or you can pay off the full balance as you choose. The ability to handle both fixed and revolving debts is an indicator of stable financial health.
Know when you NEED to apply (and when you don’t)
You should exercise caution when it comes to opening up new accounts. 10 percent of your score comes from new credit. In addition, every time you apply for credit, there is a small hit to your score because of a hard inquiry.
Hard inquiries occur when a lender checks a consumer’s credit report, which creates a small negative impact on the consumer’s credit score. If you’re shopping for a car or home loan, don’t worry: the credit scoring models will consider multiple loan inquiries together as one if they happen over a brief period of time.
Monitor your card balances
Weighing in at a hefty 30 percent, credit utilization falls closely behind payment history in importance to your overall score. Credit utilization is the combination of your total amount of debts, and how much is on each account relative to the account credit limit. There’s a common belief that you should keep your credit utilization below 30 percent, but that’s a misconception.
Your score won’t fall at 31 percent and it won’t automatically increase at 29 percent. 30 percent is not a magic number. A better rule of thumb is the lower the utilization, the better. Consumers with the highest credit scores keep their utilization in the 5 to 10 percent range. You should check your credit card statement regularly to find out what your credit limit is, as it can change without you being notified.
Your Credit Score, Your Mortgage, and You
Many borrowers have similar concerns when it comes to their credit score, and how it affects their mortgage. We’re here to answer questions and squash misconceptions.
Q: Does my spouse’s credit affect our loan?
A: Although getting married does not automatically impact your credit score, there are things couples do that result in changes. For example, opening joint credit cards or loans generally results in the usage affecting both credit histories. Late payments, excessive use of credit, bank overdraft penalties and other negatives may impact both spouses.
On the other hand, adequately managed joint accounts could help raise scores. When partners work together in a fiscally responsible fashion, that teamwork could help the couple to secure a home loan. It’s essential for married couples to keep in mind that commingling money and credit can positively or negatively affect your ability to get a loan. It’s all about how you manage money as a couple.
Q: Does a low credit score mean I can’t get a loan?
A: Although your score is a factor in the approval process, there are loan options specifically for homebuyers with a lower credit score. The truth is this, you might have more loan options than you think. Each person’s financial situation is different, so it’s important to speak with a Mortgage Advisor about your specific needs. However, PRM has multiple resources that can help get you started on your journey toward homeownership.
Q: Do credit pulls lower my score?
A: The three big credit bureaus (Experian, TransUnion, and Equifax) state it plainly: a borrower’s score will not drop when a mortgage lender pulls their credit more than once in a two-week period.
Not all credit checks are weighted equally. A credit card application carries more weight on credit than a mortgage loan. Credit card debts have a tendency to increase over time, make for larger risk which lowers credit. Mortgage debt, by contrast, eventually pays down to $0, so mortgage loan checks don’t have as much weight on overall credit score.