One of the important things when you want to purchase a home and escape the rent trap is your credit score. While there are a bunch of theories out there about where your score needs to be, in reality, for most loan products these days, you need to be at or above a 620 FICO for most common loan types. How do you get it there? Well, here are some general tips for understanding your score. If you want to know where your score stands, there are a ton of apps these days, but one of the big ones a lot of people use is Credit Karma which can be downloaded for free and will give you a good estimate of your credit standing.
Know Your FICO Score
FICO measures credit-worthiness. Underwriters have determined that people with low FICO scores default on loans with far greater frequency than do their higher scoring peers, so they use three credit bureaus — Equifax, Experian, and Trans Union — to determine your score in several ways:
1. Delinquencies: A 30-day late payment is less risky than a 90-day late payment. You want to ALWAYS pay on time to keep that score in the good / great range.
2. New credit: Your score drops when you open several credit accounts in a short period, as you may be unable to meet new credit obligations. When you get a mortgage they factor in your new payment amount in addition to
3. A long credit history is better than a newly established one. Building credit takes time and that's okay. The ability to keep accounts in good standing over long periods shows responsibility and stability.
4. A consumer with “maxed out” cards may have trouble with payments. You want to keep your balances under 25% if possible, 10% or less is ideal. EXAMPLE: If your credit line is $1000, you want to keep that carried balance lower than $250.
5. Public records: Tax liens and bankruptcies jeopardize a healthy FICO score.
6. The use of consumer credit counseling agencies may lower scores.
7. Small balances, no late payments show responsibility. Lenders want to know that you can repay and responsibly manage credit lines.
8. Too few revolving accounts: If you fail to use credit, there is no way to evaluate your ability to manage it.
9. Too many revolving accounts may mean overextension.
10. Credit scores affect interest rates. Some lenders establish lower interest for high FICO scores and vice versa.