Did you know that there are multiple types of credit scores? Credit scores didn’t seem too important for banks until the 1970’s. Prior to the 70’s there were various credit bureaus and they weren’t as reliable as they are today. As a result, banks would primarily base credit decisions on an applicant’s character rather than their actual ability to repay their debt.
Once The Fair Credit Reporting Act was passed in 1970, more regulations were formalized to help ensure the credit was more fairly extended to applicants based on their creditworthiness instead of their character.
Understanding how credit scoring works and keeping up to date with your current credit score will help you increase your score over time.
How your credit score is calculated:
Payment history (NO LATE PAYMENTS, NO COLLECTIONS, NO DEROGATORY)
How much you owe (KEEP BALANCES UNDER 30% OF LIMIT)
Length of your credit history (THE LONGER, THE BETTER)
Types of accounts (AUTO LOAN, CREDIT CARD, MORTGAGE)
New Credit (KEEP THIS MINIMAL)
An example of how to increase credit score: Having at least 3 trade lines, i.e. auto loan, credit card, and a mortgage with at least 12 months of payment history, with balances as close to or under 30% of the initial credit line amount, and no recent credit inquiries will put you on your way to securing a credit score that may put you in the “GOOD” to “EXCELLENT” categories.
Not having a mortgage won’t damage your credit. If renting is your only option, it’s okay to have 2 credit cards and 1 auto loan or whichever approach works best for you. The goal would be to have 3 trade lines with monthly payments being made to each of them every month.
Wanting to get your credit score to 800? Then stop doing these things:
Getting credit cards and not using them
Making minimum monthly payments on credit cards (if balance is over 30%)
Frequently applying for new credit
Securing new credit frequently
Paying off installment loans early
Not monitoring your credit report
Co-sign for anyone
If you have a credit card, it will NOT help your credit score if you do not use it and make monthly payments (every month). Be sure to use the card AND make a monthly payment every single month.
If your credit card balance is greater than 30% of your credit card limit, this could keep your credit score from increasing. Minimum payments are fine if the balance is LESS than 30% of the limit.
Excessive credit inquiries may imply to the credit bureau that you’re intending to borrow more than what you can afford and this could hinder your credit score.
Constantly getting new credit, i.e. auto loan and/or credit cards may hinder your credit because they are new trade lines. Newer trade lines do not have payment history established to help the credit score. It may take at least 6 months of payment history for a trade line to begin helping your credit score.
Paying off loans (primarily installment loans, i.e. auto loans) may hinder your credit score as well. Since credit scoring prefers more payment history than less, paying off a loan sooner than expected (especially in less than 6 months) will not help the credit score.
Be sure to get a FREE copy of your credit report every year. It’s FREE! And it’s your responsibility to know what’s on there. It doesn’t hurt to have credit monitoring as well. There are paid services that provide credit monitoring but most credit card companies offer this as a service as well.
Lastly, co-signing is highly NOT recommended! “Do not be one who shakes hands in pledge or puts up security for debts; if you lack the means to pay, your vey bed will be snatched from under you.” –Proverbs 22:26-27.
Like what you're reading? Check out my other articles at TheHomeLoanHub.com
Terry Roberts, USMC Veteran | Sr. Loan Officer NMLS 397987 | E Mortgage Capital
With a rich background spanning over a decade in the mortgage and real estate sectors, Terry Roberts has become a cornerstone in guiding over 10,000 clients through the complexities of the home purchasing journey in the United States. His expertise covers a broad spectrum of housing loans including conventional, FHA, VA, and cutting-edge new construction financing options.
Emerging from challenging early life circumstances, including teenage parenthood, dropping out of high school, and facing homelessness, Terry's determination led him to serve in the US Marine Corps. This decision was driven by a commitment to safeguarding freedom and securing a better future for his family. His active duty service in the US Marine Corps, marked by nearly a decade of dedication, instilled in him a profound desire to assist fellow Americans in achieving homeownership, a cornerstone of the American dream that he fiercely believes in.
Terry leverages his profound understanding of the real estate market to empower individuals in their pursuit of property ownership as a strategic investment for wealth generation. His journey from adversity to becoming a beacon of hope and guidance in the real estate domain is not just inspiring but a testament to his commitment to his clients' success.
Connect with Terry Roberts, a proud USMC Veteran and Senior Mortgage Broker (NMLS 397987), for expert guidance on your path to homeownership. Visit www.TerryRoberts.com at E Mortgage Capital, where every client's dream is approached with the respect and dedication it deserves.
Comments