Understanding credit is one of the most important concepts when purchasing real estate. Buyers fail to maintain a better understanding of their individual credit scores and settle for higher interest rates when purchasing. Knowing what to look for and how to care for credit is your first step to future purchase.
Credit Score Defined
§ A Statistical model that evaluates and compares credit data from millions of consumers which in turn applies complex mathematical formulas to determine whether a consumer will default on their loan obligation in the future.
§ There are multiple Scoring Models for each Bureau.
§ The Models are applied to a consumers credit data within the particular bureau to try to determine whether a consumer will be a good payer or a bad payer.
Top Things To Consider About Credit
§ Each score is specific for each Bureau.
§ Score predicts chances of default.
§ Scores range from 300 to 850 for Classic FICO, 150-950 for NextGen. Your score will become your grade in the future and turn to an A, B, C, D or F system.
§ The higher the score the less the odds of default.
§ The score is generated by analyzing the information contained in the consumer’s credit report at THAT point in time.
§ Credit-scoring software has no memory.
What The Score Means
Odds of a Consumer becoming 90 days late or more on a loan:
Score Odds
Above 800 1292 to 1
760 to 799 597 to 1
720 to 759 323 to 1
700 to 719 123 to 1
680 to 699 55 to 1
660 to 679 38 to 1
620 to 659 26 to 1
500 to 600 8 to 1
Below 500 Live with Mom!
How Do People Score?
Above 780 4%
740-780 13%
690-740 26%
620-690 30%
Below 620 27%
Did you know Texas has the lowest overall credit score average of all states at 668.
What Factors Determine A Credit Score?
· Past delinquency.
· The way credit has been used.
· The age of the credit file.
· The number of times a person asks for credit.
· A customer's mix of credit.
Identifying Credit Score Codes:
· Reason Codes ranked in order of importance.
· Reason codes show where consumer lacks in scoring categories.
· Identify items in report and try to remedy.
· Don’t only focus on late payments when trying to increase the score.
· Codes are a number or a letter followed by a brief description.
Breaking Down Past Delinquencies
· The more recent the delinquency, the more of a negative effect.
· Date of last activity determines score effect.
· Pay-off collections in escrow, not before.
· Past Dues destroy a score. Bring current immediately.
· 30 day late last month worse than 60 day late 5 months ago or a 90 day 3 years ago.
· Paying a charge-off or a lien won’t help or hurt unless it occurred within the past 24 months.
· Negative information is not considered in the score during the investigation.
Using Credit Wisely
· Make sure that the credit limit is being reported on the bureau report.
· Do not close credit cards except in certain circumstances.
· Share outstanding debt among many cards. Below 35% of credit limit on all cards.
· Get Sign & Travel/Flex Pay on Amex cards so it gets reported as a revolving credit account.
· Keep Credit separate from Spouse. . .
o One maxed, both maxed.
o One delinquent, both delinquent.
Scores are weighted as follows:
1. 35% Payment history, collections, public records.
· More recent, more negative effect
· More derogatory, more negative effect.
· Weight given pertaining to derogatory info: Serious delinquency, charge-off, repossession, foreclosure and bankruptcy.
· Missing low payments is better than missing high payments.
2. 30% Outstanding balances being carried on accounts.
· Ideally should be below 35%
· Better to be spread over a few cards rather than on one.
· Get letters from creditor faxed stating balance.
· Don’t pay-off while 30 days late, may not update.
· Score does not distinguish between business and personal cards.
· An authorized user is treated as if it’s a joint account.
· Equifax Credit Watch.
- Protection from identity theft.
- Score simulator is great.
- ID theft insurance of $2500.
3. 15% Length of credit history.
- Hold onto old credit cards, even if the rate is not great.
- The longer the history the better.
- Piggyback off Mom.
4. 10% Types of credit.
- Mixture is best.
- 3 to 5 revolving credit cards is optimal.
- A mortgage account raises the score.
- New credit temporarily decreases the score for a month until unrated status goes away.
- Equity lines of credit are treated as credit cards when the amount is low.
5. 10% Inquiries
· Multiple Auto and mortgage inquiries are treated as one inquiry if within 14 days of each other.
· Inquiries affect the score for one year
· Score is only reduced for the first ten inquiries.
· Personal, promotional and account review inquiries don’t count.
· Inquiries can cost between 2 and 50 points on the score.
· 30-day buffer period before mortgage and auto inquiries count.
· Insurance inquiries don’t count.
A special thanks to:
Roger Ryman
Certifed Mortgage Planner
Prime Lending
550 Post Oak Blvd Ste. 350
Houston, TX 77027
713-446-9666 Cell
rryman@primelending.com
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