Published 3 May 2018
Credit scores are a big deal. According to a Dec. 14, 2017 article published on Bankrate, “When you’re applying for a mortgage, your credit score has the most meaningful impact on the rates you’ll be offered. In his book, “The Smart Consumer’s Guide to Good Credit”, author John Ulzheimer observes that credit scores are “as important as a solid appraisal and having sufficient income.”
The concept is pretty straightforward. People and companies that extend credit assume you’re going to pay or repay them in the same manner you’re paying (or have paid) your other creditors. The level of risk you present to creditors — such as insurance companies, banks and mortgage companies, landlords and others — is expressed by your credit score. Credit scores are also commonly referred to as FICO or Vantage scores. FICO is an acronym for Fair Isaac Corporation, the folks who own the scoring software. Vantage is a joint venture of the big three credit bureaus; Experian, Equifax and TransUnion.
Credit scores can range from a low of 300 to a high of 850, with many plateaus in between. The lower your score, the greater the risk you pose to the creditor and the more you’ll pay to borrow, insure or rent. Individual scores are derived by rating five individual aspects of your credit history.
First up is your payment history, or how well you’ve paid your obligations in the past. Whether you pay in a timely manner makes up the largest portion of your score, accounting for 35 percent of your total. The next largest portion of your score, 30 percent, is based on how much you owe. Keep in mind that it’s better to owe $5,000 on a card with a $10,000 limit than it is to owe $3,000 on a card with a $4,000 limit. Ideally, your balances should not exceed 30 percent of your total available credit. Balances should be paid in full each month to achieve the highest possible score in this category.
The third component of your score is based on the length of your credit history and is responsible for 15 percent of your total. Has anyone ever suggested that you close your old accounts? Don’t do it! Doing so will shorten the length of your credit history, as will opening new accounts, both of which will bring down the average age of your history.
Number four on the list is calculated based on new credit obtained and is responsible for 10 percent of your overall score. Have you opened quite a few accounts lately? If so, this portion of your score will diminish your overall score because it appears that you’re on a quest to borrow, which may put a strain on your finances in the future. And last but not least, the final 10 percent of your score is based on the type of credit you’re using. The mix includes mortgages, credit cards, retail accounts and the like.
As illustrated in the Credit Score Calculator from myFico.com, a good credit score can indeed save you money. The monthly principal and interest payment on a $150,000 loan originated in New Mexico on April 29, 2017 ranges between $738 and $884, depending on one’s credit score. The amount of interest you’ll pay over the life of the loan is also impacted by the rate you are charged.
In the end, you are the only person on the planet who’s in charge of your credit scores. If you haven’t checked your credit file recently, it may be a good idea to do so now. Everyone in the U.S. is entitled to a free annual look into their credit files at each of the three credit bureaus. Free access can be gained by logging on to annualcreditreport.com or by calling toll free to 877-322-8228. No phone or computer? You can also request your reports by writing to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
With a little due diligence and an improved credit score, there’s a good chance that you’ll save thousands of dollars in the long run.
See you at closing.
Gary Sandler is a full-time Realtor and president of Gary Sandler Inc., Realtors in Las Cruces. He can be reached at 575-642-2292 or Gary@GarySandler.com.