02 Apr 5 Determining Factors of Credit Scores
When it comes to getting a loan in real estate, you are going to want an awesome credit score. Unfortunately, this can be a pain to monitor. Understanding how your credit score is calculated and what you need to be aiming for can be vital to getting great interest rates!
For many people, keeping a close eye on their credit score and actively maintaining a healthy score can be a daunting task. This is especially true for anyone along the spectrum of new life choices or unexpected changes. Whether it’s purchasing a vehicle or home, or perhaps a sudden barrage of medical bills, one can be faced with the reality of the power held by those three numbers.
Your credit score is composed of five determining factors
35% of the weighting of a credit score is based on your payment history. Late payments will bring your score down heavily. Make sure you are paying all of your bills on time and in full. If you struggle with this, create a schedule or calendar reminders. Set reminders on your phone that will go off when your bill is due, and you should be on time.
If you make late payments because you are low on cash, put yourself on a budget. Your bills will come out around the same time every month, so plan around them. Make sure you have enough money in your account to pay the bills coming out each week.
If you are consistently not paying a certain bill, consider taking it off of your account. For example, you may be late on your cable bill every month. How important is it to you to keep that? It may be really important and you’re going to work on paying it on time. That is perfectly fine. You might find, after consideration, that you don’t use cable that often and you could stop worrying about paying it. Find what works for you, but always pay your bills on time.
Outstanding Credit Balances
You should never owe more than 50% on each credit card you have. For example, if your credit limit is $10,000 then you should never charge more than $5,000. If you really want to keep it impeccable, then you should never owe more than a third, or 33%. That means if you have a credit line of $10,000, you wouldn’t charge more than $3,300.
It doesn’t build your credit if you pay off the balance every month. What creditors want to see is that you’re able to make a monthly payment. If you keep your balance down and make the minimum payment every month, your payment history will look good. This accounts for 30% of the “credit score pie”.
Length of Credit History
How long you have had credit makes up 15% of your credit score. Most people think this means how long they have had a credit card. That is incorrect. There is a separate credit history for each line of credit you have. If you are looking to improve your credit score, this is important. Don’t open any new credit cards, and work on paying off what you have.
Number of Inquiries
This accounts for 10% of your score. Inquiries are when lenders request your report or your credit score. I don’t let people hit my credit unnecessarily for a lot of reasons. Some people will go car shopping for a couple weeks and the salesman will check your credit 7-8 times in two weeks. This is not a good thing.
Though it only weighs 10%, each inquiry can last on your report for up to two years. Be careful when allowing lenders to check your credit score.
Your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans are all factored into your credit score. You don’t have to have one of each, especially if you don’t need them, however, it does help lenders see that you can pay back what you owe.
Again, this accounts for the final 10% of your credit score. People with a smaller credit mix are viewed as a higher risk than people who have managed credit responsibly.
The difference between a low and high credit score on interest rates is 3.5-4%. As you can see, having a good credit score is imperative for having a successful real estate business.