“What is credit? FICO Scores?” The Mysterious World of Credit
(We are not the author of the following information but it is shared by permission from Mike the Credit Guy)
There is a saying out that goes like this: “People don’t know what they don’t know.” So true. And in the realm of credit, people don’t know much at all. It isn’t taught about in school. We are told our credit is bad or good. That doesn’t do much for educating us on how to manage our credit so we can take advantage of better offers, interest rates and deals. Hopefully, this will give you a snapshot education on credit to remove some misconceptions you may have.
Think of your credit as a picture. Your credit picture is made up of five different areas:
1. Payment history – 35% of your credit score is based on your payment history, so make sure you aren’t late on any payments. One 30 day late payment can drastically decrease your score.
2. Amounts owed – 30% or your score is reflected by the proportion of balance to credit limit. A good rule of thumb is to keep your balance below 30% of your credit limit. That will build your credit. No matter if you have a $300 limit or a $10,000 limit NEVER exceed 30% of the limit.
3. Length of history – This accounts for 15% of your score. The longer the account has been active, the better. A zero balance on a card does not reflect as an active account. Keep a small balance on the account, even as low as $5.00 to keep the account active. Closing an account because it is paid in full WILL HURT your score.
4. Credit Inquiries – Only 10% of your score is based on this factor. It is still very important to prevent having your credit report pulled as often as you can. Do not apply for too many accounts. The more you have your credit pulled, the more your score will decrease.
5. Type of Credit – Again, 10% of your score is based on this. The best scores will have a mix of both revolving accounts such as credit cards and installment accounts such as a mortgage or car loans.
There are a few things you can do to establish or re-establish your credit. Obtaining a secure credit card that reports to all three credit bureaus is a great way to start. This means you deposit the money, usually $300 and they issue a credit card with a limit of $300. Remember to keep the balance under 30%, in this case, $90. To establish credit quickly, get an installment loan. This doesn’t have to be anything expensive with large payments. Keep the payments affordable and always pay on time.
Lastly, if you are looking to buy a home, make sure you speak to a lender that you trust. A good lender will walk you through your credit report and give you a road map to raising your scores to where they need to be. Don’t wait until you think you are ready to buy either. It is a great idea to talk to a lender about 6 months before you are ready to buy so your credit has plenty of time to adjust. Your Realtor will be grateful, but more importantly, you will be in a much better position to get the house that you want!
Tony Clark Realtors believes everyone should feel confident when buying and selling a home. We are here to be your trusted adviser. Since 1976, we are the Owensboro Kentucky market expert.
Tony Clark Realtors | 2934 Frederica Street Owensboro, Kentucky | (270) 683-SOLD
Tony Clark Realtors®, LLC is located in Owensboro, KY, and has been representing home buyers and home sellers for over 40 years. Tony Clark Realtors® is also trusted by many property owners to manage their rental properties, having one of the largest portfolios of rental properties available in the area. When you choose Tony Clark Realtors® for your real estate needs, you can have peace of mind as to the high value and quality of service you'll receive.