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When trying to get qualified for a mortgage loan on Real Estate, what is the top factor in determining your eligibility? Your credit score.
And just how important is it? Well, just imagine you bought a $300,000 house here in Northwest Arkansas and you put 20% down. When getting this mortgage, the difference between a “good” credit score and an “excellent” credit score will be more than $30,000 over the life of the loan. That’s an extra $1,000 more per year.
As you can see, putting in the work required to have a great credit score can be very beneficial. The good news is that with only about 30 minutes of effort, you can put effective systems in place to keep your score climbing higher and higher.
So are you ready to learn the 3 Simple Steps to a Better Credit Score?
Okay. Let’s first discuss the factors influencing your credit:
-Payment History 35%
Pretty simple, this is whether you’ve made your payments on time or have been late. The more you’ve missed, the worse your score will be.
-Debt Utilization Ratio 30%
This is the percentage of credit you actually use compared to the amount of credit that is available to you.
-Length of Credit History 15%
How long the accounts have been open. Usually determined by an average of all accounts.
-Credit Inquiries 10%
You get negative points every time you apply for new credit.
-Account Mix 10%
Ideally you’d have a mix of installment credit (loans) and revolving (credit cards).
Notice that the Top 3 factors comprise 80% of the total score. So, we need to do everything in our power to get those 3 factors performing at the highest level.
So the 1st Simple Step is to make sure we Never, Ever Miss a Payment. The easiest way to do this is to set your debt payments to auto-draft from your account of choice.
On credit cards, it’s always best if you can pay the full balance every month, but even if that’s not an option for you, the minimum balance, or (better yet) a set amount over the minimum should automatically be paid every month.
The 2nd Factor is Debt Utilization Ratio. This is the amount you spend as a percentage of the total credit available to you. Ideally, this will stay under 10%. So if you have a $5,000 credit card, never spend more than $500 on that card.
This ratio applies, even if you pay the card in full every month. It’s based on the amount you spend, independent of how much you pay back, or how quickly.
So the best way to improve this factor, aside from just having the willpower to never go over that 10%, is to ask you credit issuer to raise your limits. But if you carry a balance, and feel you’d just be tempted to get into more debt, then overlook this step.
The other option to help your Debt Utilization Ratio is to pay the card in full, more than once a month. This way your ratio never adds up to a significant number.
Now, the 3rd Step is to Never Close an Account. This will improve your length of credit history.
If you need to keep an old credit card open, but don’t use it very often, just set up a small recurring payment on it, and then have it auto-draft from your bank account. Just set up your Netflix account, or maybe an online subscription service or something.
Pick something small that’s already auto-drafting from your checking account and simply shift it to the credit card, and then auto-draft the credit card from you checking. I call this a credit chain. You’re just making your credit card another link in that payment chain.
So, simply focusing on these 3 things, these Top 3 Factors in your Credit Score will set you on the path toward a great credit score.
Automate Your Payments, Raise Your Limits (or make weekly payments), and Never Close an Account.
If you’d like to check your score and see how future choices may affect it, visit www.CreditKarma.com. It’s a great free resource.
And to check your likely eligibility for a home loan, just ask and I can recommend some great local Mortgage Loan Officers.
Alright, so those are my Top 3 Simple Steps to Boost Your Credit. If you’ve got any other questions, feel free to…