Credit Where Credit is Due
My kid is about to head off for college, so credit and the use of credit is on my mind. But when you're considering buying a house, assuming you don't have a large cash reserve, your credit score will play a big part in getting a good rate, or getting a loan at all.
What is credit?
The actual term credit means that someone gave you money, or let you use their money, under the agreement that you'll be paying it back within some agreed upon time period and usually with interest (read: you'll have to pay back more than you borrowed).
What is a credit score?
The three-digit number that predicts your likelihood to repay a loan on time, according to the Consumer Financial Protection Bureau. The system is nationwide and often determines whether you can get approved for a loan or a credit card. Your credit score changes all the time, and there are factors that can help your credit score, or hurt it.
The good things:
Making Payments On Time
Mix of Credit Sources
A Long History
The bad things:
Public Records (Bankruptcy and Tax Liens, for example)
Why is my credit score important?
In my business, credit scores are important because they affect the interest rate of the loan a homeowner will be offered. If you have a good credit score, you are much more likely to get a favorable rate. Favorable rate = less interest paid = lower payment. Good credit scores also are used for car insurance rates, rental applications, car loans, and cell service plans. It's also not unusual that credit scores are reviewed when applying for a job. All kinds of important stuff!
What is the history of credit scores?
Back in the day, if you needed to borrow money, you went down to your banker, who you probably knew personally, and he would personally determine if you were a good risk. Over time, banks and other financial institutions started to share information on payment histories and open accounts to protect themselves from consumers that would open more credit accounts than they would be able to repay. These groups of professionals sharing information eventually resulted in the big three credit bureaus we know and love: Experian, Equifax, and Transunion.
I know the basics, what's next?
If a lot of this was new info to you, let's start with the actual score. Do you know what your credit score is? If not, check with your bank or go online to www.annualcreditreport.com. Side note here, you are entitled by law to one free credit report from each of the three credit bureaus per year. That's because it really benefits everyone for you to be a responsible user of credit, so take advantage and monitor your credit report.
The range of a credit score is 300 to 850, so see where you are and take steps to make sure your payments are timely, at a minimum. The best thing to do is start slow and regularly monitor your score. Know and understand your interest rates, due dates, and how acquiring more credit impacts your score, before you apply for a new account.
For all those over achievers out there, if you have a credit score in the 775 range or higher, there's not a significant benefit to getting your number to the very top of the range...unless you're just competitive with your significant other, because then that's just fun.
What do I do if I have a bad credit score?
Well first, don't panic or beat yourself up. If you find yourself with a lower score than you'd like, pause and study the situation. If you've found yourself with a lot of late payments because you're not good about attention to detail, it's time to figure out a system that works for you. If you've had to use more credit because of life situations outside of your control, once you get yourself on an even keel again, get balances paid down and be sure to pay your bills on time. Credit scores can be improved with a little time and patience! On that same note, if you can't make payments for some reason, talk to your creditors. They may be able to help or at least work with you to minimize the effects of not paying.
Why should I monitor my credit report?
Identity Theft!!! Make sure the items on your report are actually yours! 8 million folks per year fall victim to identity theft, make sure you're not one of them, and if you are, that you catch it as soon as you can but disputing charges and letting your creditors know.
I've learned so much, Rebecca, tell me more!
Of course! Here are some interesting bits of trivia to keep this fun going:
According to a recent study by Experian, Gen Yers have the lowest Vantage Scores of the four generations (the Vantgage Score was established in 2006 by the three main credit bureaus to compete with Fair Isaac’s FICO score). Gen Y has a credit score of 672, Gen X (ages 30-46) has an average score of 718, Baby Boomers (47-65) have a 782, and the Greatest Generation (66+) have an average of 829.
One in 4 unemployed Americans have been required to go through a credit check when they applied for a job. One in 10 has been denied a job due to information on their credit report.
Not everyone has a credit history. If someone has never had a credit card, he or she will not have a credit or FICO score.
Occupations that regularly check an applicant’s credit score are 1) parking booth operator, 2) the military, 3) accounting, 4) mortgage loan originator, 5) Transportation Security Administrator (TSA), 6) law enforcement, and 7) temporary service positions.
The widely used FICO (Fair Isaac Corporation) score is based on the work of engineer Bill Fair and mathematician Earl Isaac who founded the firm Fair Isaac in 1956. They developed the first credit bureau-based scoring system in the mid-1980s.
Credit-scoring systems were designed for lenders, not consumers. This means that scores weren’t created to be easy to understand, and the actual formulas and the details of how they work are closely guarded trade secrets
A person getting his or her own credit report does not hurt the score. However, inquiries by creditors from whom a person has applied for credit can lower a score.
As you know, I'm not a credit advisor, but I'm a great Realtor®, and am a good resource if you're thinking that you'd like to buy a house but aren't sure about your credit situation. Drop me a note, and we'll chat!