The Basics of Credit

To put it in the simplest way, credit means having to use something before you pay for it, and it is an important part when thinking of buying a home. Here is a run-down of the basics of credit that could help you in the long run.

Your Score Doesn’t Mean Everything

Hopefully, you are already monitoring your credit scores to keep them as high as possible, but your credit score is only one factor used to assess your credit stability. While each lender assesses your credit application differently, they will all look for:

  • The money that is available to you through savings, investments or any other assets that you can use for repayment of a loan (your household income is viewed as the main source)
  • Your monthly income and how stable it has been over an extended period
  • Collateral – This is something that you own that can be used for any loans or lines of credit that you apply for that are secured by that possession
  • Credit History – your financial track record that shows how you have managed credit and made payments over time

How Your Credit Score is Broken Down

The FICO® Score, which ranges from 300 to 900, one of the better-known types of credit scores used by many lenders, generally considers a FICO® Score above 670 as a good credit score, and a score above 800 as exceptional. FICO® Scores are calculated based on the importance of the five categories:

  • 35% is based on your payment history on loans and credit cards
  • 30% is based on total debt and amounts owed
  • 15% is based on the length of credit history
  • 10% is based on new credit accounts
  • 10% is based on the credit mix or the type of credit card or loan accounts you have

How Long Does Information Stay on Your Credit?

The amount of time it takes for information to be taken off your credit report is all based on what kind of information it is. The Fair Credit Reporting Act specifies how long items remains on a credit report. Here is a list of how long the most common items remain:

  • Late payments: seven years from the date of the missed payment
  • Charged off accounts: seven years from the original delinquency date
  • Collection accounts: seven years from the original delinquency date of the account as reported to them by the original creditor.
  • Civil claim judgments: seven years from the filing date
  • Open, positive accounts: indefinitely
  • Closed, positive accounts with no negative history: 10 years from closed date
  • Inquires: two years from the date of the inquiry

Scores Lenders are Looking for

When looking for a mortgage, there are a variety of lenders out there;

  • “A Lenders,” or traditional lenders, refer to banks and credit unions that cater to customers with good credit scores and a reliable income.

–  Looking for scores: 680+

  • “B Lenders” are lenders such as Equitable Bank and Home Capital that offer a lower barrier of entry to qualifying for their products but can offset that with higher interest rates.
  • Looking for scores: 600-680
  • “Alternative Lenders” could span anyone and anything from individual lenders like your parents, or businesses that specialize in mortgages but are not subject to the same regulations that banks and credit unions are.
  • Looking for scores around: 500+

How to Improve your Credit

Improving your credit score can happen in a relatively medium period of time, but it does take some work. Since the factors affecting credit score ranges are within your control, showing you can be diligent about your spending and debt repayments will go a long way in convincing lenders you are a low-risk customer. Here are some ways in which you can improve your credit:

  • Leave old, paid on time, debts on your credit report
  • Pay your bills ON TIME
  • Set up automatic payments
  • Use your credit more and pay it off right away
  • Open a secured credit card account
  • Keep a low credit card account

Having a good understanding of your credit situation will give you a leg up when it comes to improving your credit score as well as getting loans and easing the stress when applying.

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