The Choice Blog

Credit Score and Home Loans – Prattville, AL – Part 2

Yesterday we talked about two of the five categories that make up a credit score.  Today we’re going to talk about the other three categories and tie everything together.  Remember that having a good credit score is really important if you want to buy a home in Prattville, AL or anywhere else in the River Region.  Yesterday we talked about the first two categories, Payment History and Amounts Owed.

The third category that makes up your credit score is Length of Credit History. This category looks at the length of time each of your accounts has been open and also the time since your last activity on each account.  So your accounts that have been opened longer get a higher score in this section than the accounts that you have just recently opened.  Having too many accounts that have been opened recently may lower your credit score in this section, so the best advice for home buyers is don’t open any new accounts right before applying for a home loan.  The Length of Credit History category accounts for 15% of your credit score.

The fourth category that makes up your credit score is New Credit.  This category looks at the number of accounts you have recently opened, the number of inquiries into your credit report by creditors, and how long ago that you re-established positive credit history after a previous time of payment problems.  Having lots of inquiries by creditors on your credit report makes it look like you have gone all over town trying to find someone to give you credit or give you a home loan.  This can really lower your credit score in this category. 

The final category is Types of Credit Used, which looks at the different types of credit accounts you have, such as credit cards, store credit cards, auto loans or other installment loans, consumer finance accounts and other mortgages, and also looks at the number of accounts you have of each type.  Having too many of one type of account, such as consumer finance accounts, compared to the other types of accounts, makes your credit history look unbalanced, so your credit score for this category may be lowered if your credit accounts look unbalanced.  The New Credit and Types of Credit Used categories both account for 10% of your credit score.

So there you have it.  The most important thing you can do is pay your credit accounts on time every month.  Remember that Payment History accounts for 35% of your credit score.  The next most important thing you can do is keep your Amounts Owed under 50% of your available credit on revolving accounts such as credit cards.  Doing these two things every month will help bring your credit score up dramatically in as little as six months to a year.  And when you’re eager to buy a home, having your credit score up as high as possible will help you get the best interest rates and open up the most home loans programs for you, which can possibly save you thousands of dollars over the life of your home loan.

Now that you know more about what goes into your credit score and how credit score and home loans are tied together, you can keep a closer watch on what you do with your credit cards, loans, and finance accounts every month, which will help you buy a home in Prattville, AL or somewhere else in the River Region.

Credit Score and Home Loans – Prattville, AL – Part 2

Credit Score and Home Loans – Prattville, AL – Part 1

Once you have ordered your own credit report and looked it over to make sure the information on it is correct, you might be wondering what goes into calculating your credit score.  After all, your credit score is going to affect what type of home loan you can get and even the interest rate you can get.   Credit score and home loans are tied together tightly.  So having a good credit score is really important.  And it’s important whether you’re buying a home for sale in Prattville, AL or anywhere else in the River Region.

So what factors go into calculating your credit score?  According to FICO, the Fair Isaac Corporation, your credit score is made up of five categories.  Each one of these categories carries a different weight, or different level of importance, in calculating your credit score. Even though lenders look at more than just your credit score when deciding whether to give you a home loan, such as your income and how long you’ve had your job, credit scores are a big part of the home loans process.

The first category in calculating your FICO credit score is your Payment History. This category is made up of all your credit accounts as well as public information such as bankruptcies and judgements.  So if you have other mortgages, credit cards, store credit cards, auto loans, student loans, or any other credit accounts, they will be included here.  If you pay these accounts on time, then the credit score for this category may be raised.  But if you have accounts in collections, accounts you pay late, or accounts you have defaulted on, then the calculation takes this into effect and lowers the credit score for this category.  The Payment History category accounts for 35% of your credit score.

Next is the Amounts Owed category.  This category looks at the amounts you owe on your accounts, the number of accounts that you owe balances on, and how much of your available credit you are using.  For instance, if you have a credit card that has a $5,000 credit limit, and you owe $3,000 on it, then the calculation thinks that you are using too much of your available credit for that credit card.  The general rule of thumb is that if you are using more than 50% of your available credit, then the calculation may lower the credit score for this category.  The Amounts Owed category accounts for 30% of your credit score.

This gives you a start on how your credit score is calculated.  In the next post, we’ll look at the other categories used to calculate your FICO credit score and look more closely at how credit score and home loans are tied together for buying a home for sale in Prattville, AL.  There is more helpful information on homes for sale on the Buyer’s Choice Realty website.

Credit Score and Home Loans – Prattville, AL – Part 1

Credit scores, credit history, improving your credit, using your credit wisely, etc.  All of these have an impact on buying a home.  Home buyers, especially first time buyers, can be confused about how your credit affects your ability to buy a home.  If you’re wanting to buy a home in Prattville or anywhere else in the River Region, you’re going to need to know how your credit affects your ability to buy a home for sale, and how some things you do will help your credit, and some things you do will hurt your credit.

Have you checked your own credit report and credit score?  Did you even know that you could do this?  Well, you can.  You can get your credit report for free at www.annualcreditreport.com.  Just fill out the online application and you can instantly view and even print out your own credit report.  Federal law allows you to get one copy of your credit report for free each year.  There are three credit reporting agencies, and you’ll pick which agency you want the credit report from.  You can get one agency’s report or get all three of them – it’s your choice.  It’s important for you to check your own credit before trying to buy a home.  In fact, it’s important to do this before you even start looking at homes for sale.

If you want to see your credit score, you will be charged a small fee.  The credit score is calculated by the credit reporting agency.  A credit score is a number that lenders and creditors use to help them decide whether to offer you credit or loan you money.  If your credit score is high, then creditors and lenders will see you as a good risk.  If your score is low, then they will see you as a poor risk.

But here’s something that a lot of home buyers don’t know.  The credit score you pay for may be different from the credit score that a lender will see.  In fact, usually the credit score that a lender sees is lower than the credit score you get when you order your own credit report!  Why is this?  Well, it’s all due to the way the credit score is calculated.  Lenders and other creditors use a different calculation than the calculation used for the credit score you pay for yourself.

The highest overall credit score you will see is the one that you pay for yourself.  This is because it is for your information only and isn’t based on someone offering you credit or a loan.  The next highest overall credit score will be for a creditor like a credit card or an auto loan.  This credit score is lower because they are putting more weight on parts of your credit score, like your payment history or whether or not you’ve been late on any accounts recently.  Since they are considering giving you credit or financing an auto loan for you, they want to know that you will pay your account in full and on time.  The lowest overall credit score is going to be for a mortgage loan.  This is because the mortgage lender is going to put more weight on many more parts of your credit score than other creditors will.  They will want to know how much of your credit you’re using (for instance, they want to know your outstanding balance on a credit card compared to how much available credit you have on that card) and whether or not you’ve had accounts go to collections or have had several accounts paid late. A mortgage lender is going to want to know that you will pay your house payment on time before they will give you a loan to buy one of the homes for sale on the market.

So if you order your own credit report before you buy a home (which is a really good idea for first time buyers and for any home buyers) and pay for your own credit score, you’re probably going to find that the credit score your mortgage company uses is lower than the one you paid for yourself.

Oh, and let’s clear up a myth before we go any further.  There’s a myth going around that if you order your own credit report, then that will automatically lower your credit score.  This is not true!  Your credit score is never lowered just because you ordered your own credit report!  If you order your own credit report, then your credit score will not be affected at all.

The next article is going to be about what goes into calculating your credit score.