Credit Scores — What Do They Mean, Really?

A credit score can mean a payment savings or expense of over $1300 per year and increase or decrease your buying power by $20,000!Your credit score is a numerical representation of your likelihood of defaulting on any credit obligation. Scores range from about 300-850–the higher the score, the lower the odds of default.

If your score is over 780 there is less than a 1-in-1400 chance of you defaulting, but if your score is below 620 , the odds of a default increase to 1-in-15–and the higher your score is, the lower your borrowing costs will be.

One point can make a big difference in loans option. For instance, the best loan available for a “$0-down” borrower requires a minimum 680 Score–if the borrower’s score is 679, the borrower is ineligible for this loan and must then consider another option–there are no exceptions for “being close” to 680. On a $235,000 loan, the borrower at 680 will have a loan payment (including principal, interest and mortgage insurance) of about $1580 compared to a payment of $1695 for the borrower with the 679 score. This $115 per month payment difference could translate to a $20,000 difference in purchase price and represents a $1300 per year savings.

So, What Determines Your Score?

• Payment History = 35%. Do you pay your credit on time? What is the length of your positive credit history?
• Amount Owed / Revolving Debt Ratio = 30%. Too many credit cards with balances close to the limit can severely lower your scores. Keep balances owed to 50% or less of the available credit.
• Age / Length of History = 15%. The longer the history, the better. How long have your accounts been established? When was the last time you used an account?
• Mix of Credit = 10%. Keep a healthy mix of credit including 1-2 installment loans (mortgages / auto) and no more than 3-5 revolving accounts with balances.
• Inquiries = 10%. Opening several new accounts in a short period of time represents a greater risk, but “offers” for a new credit don’t count as inquiries unless you respond to the offer.

What Can You Do To Improve Your Score?

Your score is a “snapshot” at a specific moment and can change with new actions and the passage of time. A qualified lender can help you determine what steps to take to improve your score and increase your buying power and here are the top three tips for maximizing your score:

• Don’t Close Old Accounts that are no longer in use–closing the accounts ends the “history” of the account and you actually lose points when you close old accounts.
• Pay Your Bills On Time or Early–one late payment or past-due account can lower you score by 50-100 points!
• Don’t Open New Accounts–transferring your balances from one card to a new card with a lower introductory offer can lower you scores and cost you more on larger financed items like mortgages and autos.

Know and understand the effect your credit scores will have on your mortgage and financing options and be sure to work with a lender who is certified in credit score analysis and counseling, because your score could save you thousands!

Jerra Ryan
Cherry Creek Mortgage

Written by Jerra Ryan - Visit Website Sphere: Related Content