As a homeowner, you already know the importance of good credit. But no matter how hard you try, you may not be able to maintain perfect credit year after year. Your circumstance may change, priorities could shift, and despite good intentions, you could end up damaging your credit rating.
If you think this is happening to you, what should you do? First, understand that you are not alone. Millions of Americans every year discover that their credit “score,” the numerical calculation lenders use to gauge a borrower’s creditworthiness, has fallen. Second, educate yourself. Though mysterious on the surface, the logic behind credit scores—how they are determined, how they are used by lenders—is pretty simple, and there are a few steps you can follow to improve your credit standing.
What’s in a Score?
The three main credit reporting agencies, Experian, Trans Union and Equifax, collect data on consumers and their borrowing history and share this information with lenders nationwide. A fourth company, Fair Isaac Company has designed a simple way of interpreting this data, known as a credit score. Lenders use this score to make quick and fair decisions when offering credit.
Credit scores can range from 350 on the low end to 850 at the top, with the low 600s representing the generally accepted cut-off for “good” credit. Lenders, such as your mortgage company or auto dealer, often set numerical guidelines based on credit scores to help them determine whom to offer credit and on what terms. According to Costa Mesa, California based Experian, the average nationwide credit score as of October 2010, was 693.
Your credit score isn’t the sole determinant of whether or not you are able to secure credit—and at what interest rate—but it is a factor. Some lenders may set a floor (or lowest acceptable credit score) beyond which they will not offer credit, while other lenders may simply assign different interest rates or payment terms to borrowers with lower scores.
The Right Mix
Credit scores are influenced by a number of factors, some of which go beyond the simple standard of whether all your bills have been paid on time. According to Fair Isaac, the weight of any one factor depends on the overall information in your credit report(s). The biggest determinant (35 percent) of a credit score is your payment history— how timely and fully you’ve made your payments. In this regard, every additional month you fall behind on a payment can lower your score further, while long stretches of on-time payments are viewed favorably.
The second most important determinant (30 percent) is the total outstanding amount that you owe, particularly in relation to your income. Lenders perceive every additional line of credit (from any source) as a potential barrier to your ability to pay your bills on time, particularly if your yearly income remains the same. As a rule, experts suggest carrying no more than 50 percent of your total available credit. In other words, if you have $20,000 available on all of your credit cards, you should try to restrict your amount owed to less than $10,000 at any one time. A common misconception is that closing some credit card accounts will boost your score. In reality, your score will only rise if you’re paying down the outstanding debt on those cards as you’re closing them.
Another factor is the amount of time you’ve had available credit, particularly revolving credit lines like credit cards or home equity loans. A credit report with mostly new accounts is not as favorable as one with accounts that hold a long credit history. It may be useful to consider any accounts under a year old as “new.” The type of credit matters, too. A borrower who has a mortgage, a home equity loan, credit cards and an education loan, for example, has a healthier mix of credit products than just holding credit cards. A final significant factor in determining your credit score is the number of “inquiries,” or times that a potential lender reviews your credit report. Even though all credit inquiries received within a 14-day period are viewed as a single inquiry, shopping for credit numerous times throughout the year can raise a red flag. This doesn’t include the unsolicited, preapproved credit card offers you receive in the mail.
Get a Better Score
So what do you do if you discover that your credit score is lower than desired? Here are a few simple rules to follow that can help boost your score.
• Pay down your revolving debt. Don’t move debt around between credit cards.
• Get current on bills and stay current. If paying your bills is an issue, consider using online bill paying or other automatic ways to pay your bills. You’ll set it up once and not only pay your bills but build your score automatically.
• Don’t open a lot of new accounts. Instead, hang onto and maintain your older accounts.
• If you are having trouble making ends meet, contact your creditors or see a legitimate, non-profit credit counselor. Believe it or not, creditors (mortgage or otherwise) would rather work out a payment schedule than see you fall delinquent and not pay at all. Good credit can be a homeowner’s most valuable possession. Use it wisely and guard it well!
Know your Credit score Where to go to learn your credit score and/or obtain a copy of your credit report…
1. To receive your free annual report:
Annual Credit Report Request Service
PO Box 105283
Atlanta, GA 30348-5283
2. To receive additional reports, (for a fee), which will include your credit score:
PO Box 740241
Atlanta, GA 30374
PO Box 2104
Allen, TX 75013
PO Box 1000
Chester, PA 19022
Credit Culprit – Identify Theft
One of the biggest single threats to a homeowner’s credit today is identity theft. While you may not be responsible for the debt if fraud was proven to be the culprit, it could take months or even years to clean up the mess. And during that time, you may have trouble refinancing or getting other credit. Tracking your credit use is the best method for detecting identity theft. Each of the three credit agencies provides a service (for about $50 annually) that will alert you to unauthorized use of your credit. Certain financial institutions offer similar types of services, such as e-alerts, which will automatically notify you of any suspicious activity on your account. Many times these services are free.
Chad D. Collins, Accredited Master Builder
An area native, NC Licensed General Contractor, National Association of Home Builders Master Certified Green ProfessionalTM, and Certified Aging-in-Place Specialist, Chad is one of less than 50 Accredited Master Builders in the state. He achieved this professional designations after years of experience and numerous hours of coursework via the NC Builder Institute. Chad has been an active member of the building industry since the early 1990’s. He joined the Home Builders Association (HBA) of Durham, Orange, and Chatham Counties in 2005. Chad was soon named HBA Recruiter of the Year and he subsequently chaired various HBA committees. Chad is a Licensed Home Inspector, as well as, a Licensed Lead Abatement professional.
In addition to industry awards in recognition of excellence in home building and remodeling, Collins Design-Build has twice been named Building Company of the Year via the HBA’s Triangle Sales and Marketing Council MAME (Major Achievements in Marketing Excellence) Awards. The company has also received a Best Green Built Home STARS Award from the NCHBA. Currently, Chad serves as 1st Vice President of the HBADOC, and recently completed one of Durham’s first LEED (Leadership in Energy and Environmental Design) residential projects. LEED is a green building certification program that recognizes best-in-class building strategies and practices. To receive LEED certification, projects must satisfy pre-requisites and earn points to achieve various levels of achievement.
In 2014 Chad was selected as the HBADOC 2014 Builder of the Year and recently honored at The International Builders Show in Las Vegas as the NAHB’s Certified Green Home Professional of the Year.
This post was written by Chad Collins