I find that there is a lot of confusion as it relates to credit scores and reporting. It doesn’t matter if you have been a homeowner for years and you are looking to upgrade or maybe buy some investment property or if you are interested in buying your first home unless you are planning on buying property with cash, your credit report and overall credit score matters. Why is your credit score important? Your overall credit score and credit report impact almost every aspect of your life. Your report is a roadmap that tells a very detailed and interesting story about your financial responsibility and overall financial health.
Like it or not, your credit score affects your ability to rent a car or an apartment, it impacts how much you pay for car insurance, what down payment you are required to pay, what loan amount you would qualify for, what interest rate you are charged, what loan options you may have for everything from an unsecured credit card or an open line of credit or a secure long-term loan including car loans and mortgage loans. It is very important that you build credit and maintain the highest credit score possible. So how do you build your credit and increase your credit score? Here are some little-known facts that should help answer that question.
Even if you are a Dave Ramsey fan and plan on living debt free, it is still very important that you establish and maintain some kind of credit. As a young adult trying to establish credit or an older adult trying to repair credit here are some helpful ways you can build or re-build credit.
You want to begin establishing credit by obtaining a Share Secure Credit Card. This credit card requires that you deposit the credit card limit (usually $500 - $1000 dollars) into a savings account and the funds are placed on hold in that account and are used to secure the credit line on the card. You should then use this card for small purchases throughout the month and then make the minimum monthly payment on or before the monthly due date each month. This will establish a credit line and start building a credit history. If you have bad credit this same option should be used to start to repair your credit.
These days most parents buy their teenagers a car. As a young consumer, you should ask your parents to allow you to apply for the loan and have them co-sign the loan (even if they plan on making the loan payments) this will help you begin to establish some credit history. If you are trying to repair credit obtaining a loan with a co-signer will also work to help you repair your credit report and increase your credit score.
College graduates should be sure to pay on their student loans timely each month. This too will establish a positive credit history.
What does “Good Credit” look like and what impacts your credit score?
It doesn’t matter if you have a long history of credit or you are just beginning to build and establish credit the following information is important to know and understand. There are three major credit repositories that hold and measure all of your credit information. They are Equifax, Experian
Scores are weighed based on the following percentages:
Your consumer loan payment and credit history – 35%
Outstanding loan amounts owed – 30%
Length of credit – 15%
New credit – 10%
Types of credit (secure /
In general, you are encouraged to actively use at least 20 – 30% of your obtained credit. For example, using easy math, if you have outstanding loans or credit balances totaling $10,000.00 you should be utilizing $2,000 - $3,000.00 of that available credit each month to obtain an optimal credit score. Credit scores range from 300 – 850 but generally, any credit score that is 760 or greater is considered “optimal” and will afford the consumer the same borrowing power.
How does your score compare to the rest of the population?
800 – 850 Exceptional 13%
760 – 799 Excellent 27%
700 – 759 Good 18%
650 – 699 Fair 15%
500 – 549 Bad 5%
300 – 499 Very Bad 2%
It is important to understand that the credit report and credit score that you request and obtain from a credit repository are “consumer” credit reports and are different from the “commercial” credit report a lender will get when they pull your credit. A lender pulls a commercial report that is a
By law, as a consumer, you are allowed to obtain a FREE copy of each of your credit reports from all three repositories once a year. A responsible consumer will rotate and order a copy from one of the three repositories every four months during the year to check their consumer credit score and to assure that all of the information on the credit report is accurate.
The consumer should then dispute any credit lines or payment information that is not accurate. You should dispute it with both the lender who issued the credit line that is reporting
We have over 25 years of real estate and finance experience and are skilled at working with new first-time buyers looking to purchase their first home as well as seasoned buyers who may be experiencing some credit issues and need some help cleaning up their credit. Contact us now!