All About Credit Scores!

Is this the year you plan to buy a house? 

With the new year upon us, many may be trying to get their ducks in a row in preparation to purchase a home in 2023! We want to get ahead of that and provide valuable information that we get asked about all the time. Credit scores. Don’t let credit scores intimidate you. It’s all about knowing the correct information and utilizing it to your benefit. We’re here to help, so we want to talk about credit scores we like to see from a lender’s perspective and provide some tips you can use to improve that score!

First, if you’re monitoring your score because you want to raise it this year, be aware that the free apps or credit card sites don’t provide point-for-point accuracy and tend to get less accurate the lower the score. This can make a big difference when you’re looking at different loan options, so keep it in mind! They are a great tool to see what is going on and make sure everything is accurate, though! 

Let’s dive in! 

What Is A Credit Score and Why Does It Matter?

A credit score is a financial tool that is used to help measure how financially trustworthy an individual is, based on the history and likelihood of paying back debts as agreed. Think of it like a grade, the higher the credit score you have, the more financially trustworthy you are deemed to be on paper. The lower the score, the riskier. As far as we’re involved as lenders, credit scores matter because they are used across the industry to help determine borrowing interest rates. Higher credit scores are typically correlated with lower interest rates, which can save you money over time on your loan.  

What Score Should I Aim For?

While the credit score needed for qualification can vary, depending on who the lender is and what loan program you’re using, the minimum score we like to see is usually about 640. This is because most grant programs have 640 as a minimum qualifying score. 

If you have a score that is a bit lower than 640, don’t get discouraged! Talk to us first, and we can tell you what your options are, as some loan programs do allow a lower score. However, it’s always a good idea to try to raise the score where you can because even a “small” raise in score may mean a reduced interest rate. 

How Can I Raise My Score?

As we said, a 20-point difference may seem minimal to you, but to us, it can make a BIG difference in terms of interest rate, so if you feel confident in your score and want to move forward with buying a home, pay down any of the credit card balances you can to move the score up, even marginally. 

Don’t get stuck thinking you need an 800 credit score to get great loan options! A person with a score of 800 has likely had the same credit card since the dawn of time and has been very responsible with it—but that doesn’t mean you’re out of luck. 

If you’re looking to raise your score to that 640 range or above, there are a few things you can do to help because many factors contribute to your overall score. In addition to credit card balances, other factors that play a role are late payments, credit inquiries, new accounts, and length of history with accounts.

30% Rule 

First, never charge more than 30% of your credit line on credit cards (revolving debt)—this is considered ‘responsible’—and can also help you keep your debts to a minimum. It’s generally a good rule of thumb because you want to be sure that you can comfortably make the credit card payments each month and aren’t just maxing your card for all it’s worth. 

Keep Lines of Credit Open As Long As Possible

The length of history with your credit holders helps pull your score up. If you do not have a credit card, it’s helpful to get one that you can keep for a long time, like one from your bank. You want to look for one without fees. 

An easy way to manage credit is to put something small that you already pay on your debit card—like your monthly Netflix payment— on your credit card instead and set it to pay the balance off automatically each month. This way, you’ll never have a high balance—and you won’t miss a payment! Taking this approach is a strong way to start building credit. 

What About Other Types of Loans?

Car loans, student loans, or personal loans are okay, but they don’t help the way that credit cards do to show that you are responsible—and those loans eventually get paid off, and that relationship with that line of credit ends. 

Long-term relationships matter significantly for your score, and credit cards are the only thing most Americans keep for a long time. The best advice is to use them, but do NOT abuse them or go over that 30% of your credit line—and always pay all of your bills on time. At the very least, pay the minimum payment due each month! This will help you avoid paying interest and ensure your credit score doesn’t suffer. 

Keep Track of Your Own Credit Report

If you ever find yourself with a collection on your report, make sure that you keep good records when you pay it. That way, if they don’t report it as paid to the credit bureaus, you can send your own zero balance letter in and make sure it gets reported accurately. Monitoring your credit report helps spot details like that so you can protect yourself! 

At the end of the day, we’re here to help you in any way we can. If you have further questions or want to sit down and talk more about credit scores, reach out to us! We’ll be happy to help.