Credit Score Basics

Now more than ever, your credit score can ‘make you’ or ‘break you’. Credit scores are essential when you are looking to buy a home, get a mortgage, buy a car, insurance, and even help determine the interest rate you pay on your credit cards. You cannot ignore your credit score!

So i think it is time to go over a few basics. Your credit is analyzed by 3 different credit bureaus, each has their own complex formula for determining your credit score. Your credit score = Your credit worthiness. The higher your credit score the better. Right now, you would be hard-pressed to secure a mortgage for your new home with less than a 620. Realistically, it is nearly impossible under 620. With that said, you would be better off over 720.

Lets take a look at how your actions affect your credit score.

• Late Payments – one late payment on the GAP card or your loan for that amazing 2010 Dodge Charger, and BAM!!!, your credit could drop as much as 110 points. Realistically, it will be more like a drop of 80 points for the person of average credit worthiness. Granted, the more time that has passed since that late payment, the less it will affect you, but you need to remember that PAYMENT HISTORY will account for nearly 35% of your overall credit score, you need to pay attention.
• Max that card out! – Carrying a large balance on your credit cards will hurt you. When you have charged over 40% of your available balance on your cards, you are hurting your score. When you have large amounts of money outstanding on your card, that hurts your debt utilization ratio. Moral of the story is only charge what you can pay off monthly…. it will make a difference! Debt utilization ratio accounts for 30% of your total credit score.
• Closing a Credit Line – This one gets tricky…. If you want to close that credit card line that just implemented an annual fee, or close it because they keep hiking up your interest rate, chances are good that it will impact your score. Remember that if you close a card with a zero balance, it may increase your debt utilization ratio. The impact will differ with different cards and depending on what is left on your credit report.
• Opening a Credit Line – When you return one of those great credit card offers you received via mail, you need to know that the company you just applied with will check your credit report. In doing so, they create an inquiry. Inquiries will ding your credit score a few points and it may all be worth it to open a new line of credit. Just don’t go filling out every offer you get or agreeing to sign up for cards at that trendy new store in the mall when they offer 15% off the day’s purchases when you apply for their in-store credit card!
• Defaulting – This one isn’t hard to figure out. If you default on a credit line, you are breaking your promise to repay. Of course it is going to wreck your credit score. Bankruptcies, foreclosures, short sales, write-offs….. they all royally mess up your credit score. I know that in today’s economy, this is happening everywhere around us, just don’t expect your credit to bounce back within months of a default.

So, in review, pay your credit lines on time, don’t have more than 40% of your available balance charged at any time, don’t close accounts just to get rid of them, don’t apply for every shiny new credit offer that comes your way, and make good on your promise to repay.

Although one mis-step can lower your credit score, it may take months and even years to rebuild or repair damaged credit. Keep an eye on your credit report, make sure that everything is accurate. Once a year, take advantage of the free credit report and KNOW what your credit report says.

Getting a mortgage is getting more difficult due to all the default in today’s economy, but with a solid credit history, your chances of getting a mortgage for your new home will be much better!

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