Few numbers can rattle a person like their credit store. Good credit can have you set to access a world of financial options and the means to expand and grow your wealth. Bad credit, on the other hand, can leave you in a major bind when you need to pull a loan or make a large purchase. It’s an unfortunate fact, but the health of your financial life is tied to those three digits.
Real estate is no exception: your credit score plays an integral role in attracting a lender, negotiating a mortgage, and ultimately financing a home purchase. That’s why this article will cover the ins and out of your credit score to give you a sense of what it is, what it takes to raise it and keep it high, and how you should keep tabs on it.
What Is a Credit Score Anyway?
Your credit score is a number that reflects your debt payment history; the amounts you owe, the length of your credit history, how many types of credit you have in use, and the frequency of your inquiries into your financial background. Each factor carries a different weight (as you can see in the table below), and their summation gives lenders and other firms a sense of your financial health.
History with Paying Debt
Length of Credit History
Types of Credit in Use
There are a variety of ranges for the different types of credit scores (more on that in a bit), with a higher number reporting a higher degree of credit worthiness and a lower number indicating greater risk as a potential borrower.
The most popular credit scores are VantageScore, which was devised by the credit reporting companies Experian, Equifax, and TransUnion, as well as the scoring systems developed by the Fair Isaac Corporation (FICO). The multiplicity of scores on the market mean that while a high number is generally a strong indicator, what really matters is where your number falls within the range afforded by each respective scoring system. One or two points can spell the difference between a preferable rate on your home mortgage and one that chokes you out of a larger share of your monthly budget.
We won’t go into the details behind each scoring system, but bear in mind that FICO scores and their 300-850 point range are by far the most widely used among the lending community. Different score clusters under the FICO model have corresponding values from very poor to exceptional, and so as a general rule, you want to keep your credit score above 670 for your best shot at a good mortgage offer.
Your credit score isn’t the only defining factor, since lenders can see the particulars behind the number by digging, as most do, into your credit history: the details of your present and former credit accounts, as well as major events in your financial history such as instances of bankruptcy. They’re guaranteed by law to have the opportunity to do this, so it’s still in your best interest to avoid any financial missteps–no matter how well you think you can recover from them.
At this point, be sure to note the major difference between your credit score and a credit report. The former is a number that summarizes your financial health, which can vary depending on who you ask for a score. The latter is a more comprehensive outlining of your financial history.
Checking Your Credit Score
It isn’t strictly important for you to know your credit score–the number is surely interesting, but it’d be more useful for you to know your credit history since it correlates with your score anyways. Think of your credit score as your final grade in a class: it gives you an idea about your overall performance as a student, but says nothing on its own about what lessons you had trouble learning and where you excelled.
You can take advantage of the fact that the federal government is well aware of the importance of keeping track of your financial statistics, and apply for a credit report from any of the three big credit reporting agencies (Equifax, Experian, and TransUnion). They’re required to provide you with a report upon request, free of charge, once every 12 months. If it hasn’t been at least a year since your last check, you can always apply for another report, but it will cost you.
If you really want to check your credit score, you’ll find it a fairly simple process. You have a handful of options to go about it. Credit card companies and loan providers might include your credit score in your periodic statements, or upon request. Alternately, you can consult with certain websites or non-profit credit counselors for a free score and report, as well as advice on how to manage it. Finally, you can buy a score directly from credit reporting companies like myfico.com.
Now, there’s a popular misconception that checking your credit score can lower it. While this isn’t strictly the case, and personal inquiries into one’s own score won’t have any bearing on the number, there are instances when inquiries can leave anywhere between a small to a significant dent.
Soft Pulls vs. Hard Pulls
The difference lies in whether the inquiry was a hard pull or a soft pull. Hard inquiries are those performed by lenders and credit card companies when an application is final and they need the clearest possible gauge of your financial history. On the other hand, soft pulls are those done by private individuals checking their own scores, or lenders who want an idea of a potential applicant’s score but aren’t processing any binding commitments (for instance, when a person is seeking a pre-qualification for a mortgage).
Soft pulls are harmless, but hard pulls can leave negative impacts on your credit score and feature on your history for around two years. This is because too many hard pulls in a short span of time give the impression that a person is or was desperate for credit, to the point where they’ve tried applying for loans with just about any firm that’s offering.
Improving Your Credit Score
Building good credit takes years of disciplined financial management. There’s no such thing as an overnight fix since, from a lender’s perspective, the length of your credit history hints at its quality. From a lenders perspective, people with longer histories of managing debt are more dependable than people with short, sporadic histories.
The first thing to consider when you set out to build great credit is to study your own credit report. For one thing, it should give you a clear idea of where you need improvement, what mistakes you’ll have to account for, and what repeated mistakes you should act to correct. Being aware of your credit performance as it exists on paper helps you reflect on your habits, and may be the most critical step before you can successfully try anything else.
Finding Errors in your Credit Report
It’s also possible that your credit report might include errors –after all, nobody’s perfect. You can save yourself a lot of heartache down the line by identifying them and refuting them with the appropriate agencies.
Making Payments On-time
The next most important step is to make sure all your payments are regular and timely. Putting forth a good face for the next major financier is as simple as paying off all previous ones as much as they ask for, when they ask for it. Setting up payment reminders and building your budget around your debt payments rather than working them into your spending plans for a month or year can help massively with this.
Moreover, if you are unfortunate enough to have missed payments, make sure the mistake only happens once as your credit score will recover after enough time, and with enough regular installments made. Outstanding balances are often sold to debt collectors, and paying off a collection account will stay on your record for at least several years; each payment made on time is a small certainty that your error won’t be a repeated problem.
Next, you’ll want to make sure you don’t rack up too much debt. While you should pull a reasonable number of loans and credit cards to help you build a strong credit history, too much debt can be taken as a sign of financial irresponsibility. At the same time, make sure that your debt is spaced out, since accumulating a large number of debt obligations in a short span of time is also a negative sign for would-be lenders.
Use credit wisely
It’s good for your overall score to make payments on time, however you’ll want to do so while maintaining a low balance. Another quick tip: opening credit cards and never using them can actually harm your credit. Remember, credit scoring systems are the result of years of research, testing, and calibration; you aren’t going to get far trying to trick them.
Finally, take note that when shopping for a mortgage, you should apply for pre-approval with different lenders within a fairly short period of time. Your FICO score counts this as shopping for a single loan, rather than scrambling for many new lines of credit, so the minor shock to your score due to the hard pulls only counts once.
Consult an Expert
Consulting a financial advisor is your best recourse. Not only are they specialized in handling cases of credit recovery, but their outside perspectives on your spending habits and financial plans can give you much needed points of consideration that you wouldn’t have otherwise imagined. While we may be the best people to fix our own problems, identifying those problems can often be easier with the help of an objective third party.
Some Parting Thoughts
In conclusion, we want to restate the value of discipline when it comes to managing your finances. If you have a solid plan for how to handle the money you earn over the course of your life, you have a distinct advantage compared to people who rely on a vague understanding of their present situations and future needs. For your own sake, be a responsible consumer and avoid large, impulse purchases on goods that will do more harm than good in a financial analysis. Promoting financial responsibility might be our advocacy, but acting on it is your responsibility.
It helps to remember that well over a third of all Americans fall into the subprime category and below, and will have trouble accessing favorable rates on their loans and credit. How you handle your finances today can leave a lasting impact on your ability to provide for yourself, or provide for your family–especially when the housing market is concerned.
Get smart, think ahead, and keep a close eye on your credit history.