With Credit Scores More Important Than Ever, Here’s What You Need to Know

Sweeping changes have been implemented for all FHA, VA and conventional home loans in the past few weeks. In addition to increasing interest rates for borrowers purchasing at the “top of their buying power,” a borrower’s credit score now has an even bigger impact on interest rate than in the past. I asked Jaxzann Riggs, owner of The Mortgage Network to review “credit basics” with me and learned the following:

The five categories of data that impact your score, are: Payment History, Balances, Length of History, Types of Credit, and New Credit.

Your payment history makes up 35% of your credit score. For those who need the bottom line version of this paragraph – pay your bills on time.  Potential lenders want to know if you are paying your current credit accounts when they are due. The timeliness of payments is the biggest factor affecting your credit score, so missing or being late on even one payment will sting. If you have otherwise spotless credit, a payment that is made 30 days after its due date can knock as many as 100 points off your credit score. Clearly, late payments make a huge impact, and even further, they stay on your credit report for 7 years. If there is one thing you remember from this article, it is to make your payments on time! … or at least before they are 30 days past due.

The second largest category is balance owed. Lenders want to make sure that you are not overextended. This category will look at how much debt you have over all, how much is owed on individual accounts, and how many accounts you have with outstanding balances. With revolving credit, like credit cards, keep the amount owed on each card under 30% of the limit. 

The length of history shows whether you’ve had credit for six months or 20 years. Having a long track record without any major slip-ups suggests that your credit behavior will be consistent in the future.  Lenders and credit card issuers like that. Keep old accounts open unless there is a compelling reason to close them, such as an annual fee on a card you no longer use. You might be able to help yourself a little in this category by becoming an authorized user on an old account with an excellent payment record.

Did you know there are different types of credit? Revolving (i.e. credit cards), installment (i.e. student/auto loans), and open credit (i.e. a charge card, actually different than a credit card). Having a mix of credit account types may show lenders that you are less of a credit risk because you’ve demonstrated an ability to successfully manage different types of credit and the payment systems associated with them. Having a mix of credit accounts positively impacts scores.

Lastly, keep in mind that applying for new credit can cause your score to slip. Each application causes a hard inquiry on your credit and will likely take a few points off your score, unless the applications happen to fall withing a certain category of credit and within 7 days of each other. As an example, multiple auto loan inquiries or multiple home loan inquiries all made within seven days of each other won’t hurt your score.

Remember that it’s not a good idea to shop for a new car at the same time that you are shopping for a home loan. Lenders don’t like that.

If you are contemplating a home purchase, keep in mind that there are many steps you can take now to set yourself up for success. If you have any questions about the newly updated guidelines or need lending support in any way, do not hesitate to reach out to Jaxzann Riggs, owner of The Mortgage Network at 303- 990-2992.

Overdue Medical Bills? Upcoming Changes Will Improve Your Credit Score  

Your credit scores affect nearly every facet of your financial life. And it’s no secret that life is better with a good credit score. Good credit makes it easier to buy a car, rent an apartment or get a home loan. 

Jaxzann Riggs, owner of The Mortgage Network, shared with me some important changes that will likely improve many consumers’ credit scores.

While many potential homeowners do their homework and check their credit scores prior to applying for a loan, they are often surprised when they sit down with a mortgage broker, who informs them that the credit scores appearing on their “tri-merged, residential credit report” are significantly lower than those obtained thru consumer online sites. For some, this could mean that their house hunting is going to have to wait. 

Bank sites and Credit Karma may give you a good picture of your “consumer” credit score, but when mortgage lenders review your credit history, they use a credit score formula tailored to determine what kind of risk you’ll be for a mortgage loan. The formula weighs pieces of your credit history differently to test for such risk factors as debt collections that have been paid off. The score is tailored to mortgage lenders because it’s specifically focused on your ability to repay a home loan, versus an auto loan or credit card. With credit scores, the higher the score, the lower the mortgage interest rate. For borrowers with a credit score under 740, lenders factor the additional risk into your interest rate.

What impacts different scores? Mortgage lenders typically use a FICO score (by Fair Isaac Corporation) to determine your loan options. Your FICO score is based on many things such as your amounts owed, length of credit history, and your payment history. Payment history alone accounts for 35% of your FICO score, which looks at late payments, unpaid balances, or accounts that have gone into collections. While you may have paid off the collection shortly after a notice, unfortunately, those negative records can stay on your FICO report for a long time!

A collection account, no matter what it is owed for and no matter what the amount, can easily drop a credit score 100 points or more, depending on what the rest of the credit report looks like. According to the Consumer Financial Protection Bureau’s research, 58% of collections on a consumer’s reports are medical. And as of June 2021, the amount of medical debt on consumer credit reports was $88 billion dollars

Good News Has Arrived

Starting July 1st, the three large credit bureaus — Equifax, Experian and TransUnion — will stop including medical debt that went to collections on credit reports after it’s paid off. Under current practice, it can remain on your record for seven years.

Additionally, consumers will get a year, up from six months, before unpaid medical debt appears on credit reports once it goes to a collection agency. And in the first half of 2023, the credit bureaus will stop including anything that has a balance less than $500.

What does that mean for your FICO score? Well, that is a good question! While we know that the changes will positively affect many people, we don’t know the extent to which it will change the mortgage FICO scores until the changes go into effect.

If you have questions about your credit scores or report, get in touch with Jaxzann at 303-990-2992. She will also answer any other mortgage loan questions that you may have. 

Let’s Separate Fact From Fiction Regarding Credit Scores & Home Mortgages

By JIM SMITH, Realtor

The ink may barely be dry on your 2020 financial resolutions, and already there is great news for those of you who have resolved to become first time homeowners or to increase your real estate holdings in 2020. Both the National Association of Realtors and the Mortgage Bankers Association predict that interest rates will remain at record lows (at or below 4.0%) for most of 2020. 

Of course, interest rates directly affect your home buying power, and you are probably aware that credit scores also directly impact the interest rates offered to you by mortgage lenders. What we don’t always know, however, are the specific actions that will hurt or improve our credit scores. 

So, let’s separate fact from fiction. I thank Jaxzann Riggs of The Mortgage Network for helping me with debunking the following fictions.

Fiction: Shopping for a mortgage lender and allowing more than one lender to review your credit report will hurt your credit score.

Not true. When multiple inquiries appear on your report from mortgage lenders, the scoring models assume that you are shopping for a home loan. Most scoring models consider inquiries from mortgage lenders that occur within a 15 to 45-day period to be one inquiry, having little or no impact on your score. Regularly monitoring your own credit score online prior to applying for a home loan is an effective way to identify any errors contained in your credit file and to obtain a sense of the score that lenders will be using when preparing credit offers for you. It is important to note however, that there are in excess of 20 different scoring models and that online “consumer” reports typically have a higher score than your mortgage lender sees when pulling a “tri-merged residential mortgage” report. Most lenders are willing to start the prequalifying process with a copy of your online report but will require their own report prior to issuing a preliminary loan commitment which is normally required at the time that you write an offer to purchase a property.

Fiction: Opening a new credit card account will increase your score.

The average age of your open accounts impacts your score, and since opening one or more new accounts brings the average age of your total credit profile down, opening new accounts is normally not wise. The exception to this is the prospective first-time buyer who has little or no credit. Obtaining a retail or major credit card helps to build credit “depth.”

Fiction: Carrying a balance helps to boost your score.

Maintaining a balance on your cards does not improve your score, it simply costs you more in interest fees. Utilization of available credit is an important factor in determining your score. If you are unable to pay your credit cards in full each month, keeping the balance on the card below 30% of the credit limit is best. Another strategy to improve “utilization” is to request that your card issuer increase your credit limit. By increasing your available credit line but not your balance, you instantly lower your utilization.

Fiction: Closing accounts that you don’t use will boost your score.

Rather than closing a high interest rate card that you no longer use, request that the creditor reduce the rate and/or occasionally use and then promptly repay the card in full. Closing accounts reduces the overage credit available to you, which negatively impacts both “utilization” and “duration” of your credit profile.

    Questions? Just call Jaxzann Riggs of The Mortgage Network at 303-990-2992.