Your credit score is one of the ways mortgage lenders determine whether you’re a good bet, that is, whether to loan you money so you can buy real estate. Most credit scores range from 300 to 850, with higher scores indicating more creditworthiness. A good score is considered above 650. Your score is based on how many open accounts you have, your level of debt, and your repayment history as well as your income.
Your financial behavior affects your score. You can improve your score, but it’s not a quick process, so if you’re planning to buy a house and you need a loan, now is the time to start shoring things up.
Under the heading, “Life isn’t fair” you’ll find the length of time it takes to damage your credit is far shorter than the length of time it takes to repair it. It only takes a few months to ruin a good credit score. At six months past due, credit card accounts are often charged-off, which means a creditor declares that your debt is unlikely to be repaid. Charge-offs are one of the worst things you can do to your credit score. Bankruptcies also severely damage your credit.
So, if you want to improve your credit score, you should pay your bills on time—all bills, utilities, car payments, rent, and others. If you use credit cards and other debt wisely, you can build credit. It’s not bad to borrow. It’s bad to borrow and not repay your debt. With credit cards, as long as you pay off your balance every month, or at least pay the minimum required, you’ll be fine.
You should also repay a collection account. Although the benefits to your credit score are not immediate, it does help eventually. Once a collection is on your credit report, it factors into your credit score until the credit reporting time limit runs out. Most newer credit scoring models ignore collection amounts under $100.
Some people think you’ll damage your credit score by checking it regularly: not true. If banks or other financial institutions check your score frequently, that’ll send up a red flag, but as an individual, you can check your own score without negative consequences. A good source for this is www.creditkarma.com.
You should know that each person has several credit scores because there are several different scoring models. And for each model, there are three different credit scores for each of the major credit bureaus. Your scores will be comparable, but not identical. Also, the credit score you get online is an educational credit score and typically not the same credit score your lender is going to use, so you cannot assume you’ll get approved for a loan based on an educational credit score. It simply gives you a general idea of your credit health.
Sometimes people believe getting married or closing a credit card will improve their score. When you get married, you each maintain your individual credit scores and closing a credit card is more likely to hurt your credit score than to help it, particularly if you close the card with a balance. Leaving accounts open, especially if they’re in good standing, is typically better for your credit score.
If you don’t have a great credit score, don’t panic. A bad credit score doesn’t mean you’ll never get a loan; it just makes it harder. You may be required to pay higher interest rates or fees, but lenders look at other factors, too, like income and how much debt you currently have.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 40 years.