Mark's Credit Tips

As your source for creative mortgage financing, I've "done my homework" on credit and credit scoring. In doing so, I've found there are a lot of misconceptions out there about how credit scores are determined. I find quite often that well-intentioned people are doing things that will hurt their credit scores without knowing it. Many times they were told to do these things by someone in the mortgage or banking industry. Go figure.

I thought it would be beneficial to pass on what I have learned from the credit bureaus and to clarify some of the most common misconceptions about credit scores.

Here are the factors that affect credit scores in order of importance. The percentages shown are the extent that these items affect the score--or how much "weight they carry."

Payment History - 35% of what determines your score - DON'T BE LATE

  1. Public Record and collection items
  2. Recency, frequency, and Severity of delinquencies (in that order)

Outstanding Debt - 30% of what determines your score - DON'T MAX OUT

  1. Number of balances recently reported
  2. Average balance across all trade lines
  3. Relationship between total balances and total credit limit on revolving trade lines

Credit History - 15% of what determines your score - DON'T CLOSE CREDIT CARDS

  1. Age of oldest trade line
  2. Number of new trade lines

Pursuit of new credit - 10% of what determines your score - ONCE ESTABLISHED, LAY LOW

  1. Number of inquiries and new accounts opened in last year
  2. Amount of time since last inquiry

Types of credit in use - 10% of what determines your score - KEEP A GOOD MIX OF CREDIT

  1. The number of trade lines reported for each type:
  • Bank cards, travel/entertainment cards, dept. store cards
  • Personal finance company references ("Same as cash" NOT good)
  • Installment loans

The most shocking thing is that "paying on time" only accounts for 35 percent of what determines your score. Even if you always pay on time, you CAN still have VERY LOW SCORES if you're maxed out on everything, for example.

Hardly anyone realizes that 30 percent of what determines the score is how outstanding debt is managed. "Maxing out" credit cards is the biggest "no no." Maintain a low ratio (49% max suggested) of how much you owe in relation to how much your credit limit is. Request credit line increases or pay down balances to avoid a lower score due to being over extended.

  • NOTE: Even if you pay off the account on the next business cycle, there's a good chance the high balance will report before you do so. Then the damage is done.

Next, it's wrong to assume that scores will improve by closing accounts. People think that by having too many credit cards with high limits, their scores will be low due the risk of a "mad spending spree" that could cause them to get over-extended.

This is a fallacy.

Maintaining stability and control with large credit limits will help to produce very high scores. Closing accounts, on the other hand, will reduce the amount of credit available, which will make the person appear more "maxed out." KEEP ACCOUNTS OPEN!

Finally, credit inquiries and new credit lines can temporarily lower the score until those accounts are seasoned. Credit inquiries can affect credit scores for up to 1 year. People with very little credit must pass through this in order to get established. However, people with established credit should be careful about applying for and opening up a lot of new credit right before they apply for a home loan.

  • NOTE: If you need a loan, don't hesitate to have me run a credit report to assess your chances. The advice I can give you to improve your scores will make them go up way more than the few points they might lose by having an inquiry. For example, don't wait till your rental lease is up to get qualified. Get with me months before, so that if something needs to be fixed, you'll have time to do it.

Credit scores are very accurate in forecasting trends that lead to severe delinquency. People on the road to delinquency, tend to be over-extended, and to continually be in the pursuit of more credit. With most mortgage programs these days, the interest rates are driven by the credit scores, especially at high LTV (Loan to Value) ratios. However, I have additional programs that are still underwritten the "old fashion way," based on payment history alone without regard to credit scores for those who learn this too late.

Hopefully this information will be valuable to you. If you follow these rules, you'll improve your chances of obtaining the best loan programs available for your situation. Call me if you have any questions. TELL A FRIEND about this part of the site. You know you know several people who should read this. Call me for the best loans with high and low credit scores. Buy or refi with no $ down, and no income verification 801-808-6275.

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