Understanding Your Credit Score

When was the first time you heard about “credit?” I’m pretty sure I was a kid, probably in 4th or 5th grade, learning how to write a check (why they teach this in 5th grade and not high school I’ll never know) and our teacher was talking about balancing a checkbook and credit scores. Clearly, as a 5th grader that was over my head. I didn’t really learn what my credit score was or why it mattered until I was a freshman in college. My aunt kindly explained to me that I needed a local bank, this was before the invention of online banking (what am I like 100 years old?!) and that I needed to start building my credit so I could make adult purchases later in life. She got me a joint card through her credit union and that was it! My very first credit card where I was the primary credit holder.  I was lucky enough to have someone guide me through learning what “credit” was and why it was important for me to not just have credit but have a good credit. I never fell for those tricky credit card companies on campus giving away free tee shirts and I knew the card had to be paid off in full every month, but only because of my aunt. Little do some people know your credit score affects your entire life. It dictates your ability to qualify for any loan or future credit card, including your home loan. To shed a little light on the subject of credit and all that goes with it - including fixing it! - I’ve partnered with Maddy Armstrong of SouthernTrust Mortgage. Take it away, Maddy!  

The following is provided by Maddy Armstrong as general information. Maddy Armstrong nor Jessica Deleo are considered your loan officer, REALTOR®, or to be considered to be providing advice to any reader about your personal financial situation. Maddy Armstrong nor Jessica Deleo can be held liable for any individual decisions made about personal financial choices.

Fair Isaac Credit Scoring:

This is one of the major credit scoring systems used to determine your overall score. This system takes into account several major factors that determine what your score is. Payment History - This will account for 35% of your credit score. The most obvious way to control your score is to make payments on time. Mortgage and Installment loans will rely heavily on consistent payment history. These loans are usually larger and will reward points every 6, 12, 18, and 24 months if payments are paid on time. The further in the past your late payments are, the less they impact your score.Amount You Owe - This accounts for 30% of your credit score. Maxed out, revolving debt (credit cards) will result in loss of points. Popular belief is that if you pay the balance in full your score will remain positive. This is not accurate. Maxing out revolving debt will subtract points and, surprisingly, having zero balances on a card can also hurt. The suggested method is to keep small balances under 30% of YOUR HIGHEST BALANCE to maximize credit points. Something important to understand - CREDIT SCORING COMPARES YOUR CURRENT BALANCE TO THE HIGHEST BALANCE YOU HAVE EVER HAD ON THE CARD NOT THE LIMIT OF THE CARD. This is a common misunderstanding. New Credit - This will account for 10% of your credit score. Too many cards reflect poorly on scores as it gives a borrower more opportunity to create trouble. Opening many new accounts in a short period of time will result in an immediate loss in points. Normally creditors will pull your credit score before allowing a line of credit. This will also slightly decrease scores. If your score is poor, you may have no option but to open new credit. This may lower your score in the short term but help in the long term. Credit History - This will account for 15% of your overall credit score. Installments (loans) and mortgages with positive payment history will accrue credit points over time. The older the account and the larger the account, the more value you get in terms of credit points. Closing old installment and mortgage loans (paying in full) will reward positive points. Closing old credit card debt will result in loss of credit points. The older the credit account, the more it helps you.  Good Mixture - This will account for the final 10% of your credit score. Ideally an individual will want a mortgage, an installment loan of some sort (student loan /automobile), and revolving credit card or line of credit. The idea is to have a mixture of each type of loan available to give your credit report a well-rounded consistency. This goes along with the belief that a strong variety of credit will be able to absorb minor scuffs and blemishes which are common. An ideal credit report will contain all these factors: payment history, amount of debt, good history to allow new debt, along with a healthy mixture of loans, results in premium A+ credit scores.  

Understanding Your Credit Score

A perfect score is rewarded with such advantages in interest rates and financing because of the difficulty necessary to accomplish such scores. Pristine credit scores will drop dramatically with its first delinquency. A new delinquency added to a previously perfect credit report may result in a score drop of 70-220 points. A foreclosure/bankruptcy may result in a drop of 160-220 in points. If you make a late mortgage payment it could be a 40-100 point change and a late credit card payment 10-70. The science behind predicting score loss is all about the prior history of the individual. If the credit report was unscathed and a small collection shows up for $300 the A+ borrower may lose 50 points where the B- borrower may lose 10. If the late “fits” the report, then the “punishment” is not so severe. It's kind of like how in high school they rewarded you by doing well in standard level classes by putting you in the advanced classes the next year. You do well and they give you are harder test to take. Lovely, right? A+ borrowers lose points just as fast as D borrowers may be able to gain them. Borrowers with poor history will gain more points by repairing an item than borrowers with mediocre history. The borrower with poor credit will be able to increase scores into the B+ by making payments on time, paying down revolving debt and clearing collection balances and judgments. This may only take a year. To move from B+ to A will take the same steps but it may take two years or more to find yourself back in A+ territory. Okay, phew, is your head spinning? I know credit talk can be overwhelming but now that you understand a little more about your credit score I can tell you more on how to repair it! We'll chat about that more next week though! The last thing I'll leave you with is this; if you are considering buying a home soon do not shy away from speaking with a loan officer. Avoiding the person who is going to have to approve your loan doesn't make the situation different. It's better to understand where you stand financially early on so you can make adjustments as needed prior to putting in your first offer. Thanks for sharing all of that great knowledge, Maddy! I know it probably seems overwhelming but Maddy (or another loan officer) is a great resource when you are thinking of buying a home and know you might need to do a little credit repair. As Maddy mentioned we'll chat about credit repair more next week but if you encounter questions before then feel free to reach out to her or another loan officer. 

Happy Hunting,

 Maddy Armstrong, LenderSouthern Trust MortgagesNMLS 916952Office: 804.305.2344Email: MArmstrong@SouthernTrust.com