Here we are at week three already! If you missed out on the other posts, be sure to visit them here and here.
This week we are exploring what it actually means to have good or bad credit.
In my nearly 20 years of lending experience, the amount of misinformation I’ve encountered over what it means to have good credit has never ceased to amaze me. I’ve heard everything from “I just paid off my last collection, so my credit should be fine” to “I’m worried I might have bad credit because six months ago I paid my electric bill late”.
So… what does it mean to have bad credit? Most lenders in today’s mortgage climate will tell you it means having a credit score under 620. Remember, a credit score is a numerical indicator of how likely you are to repay your debts on time. The higher the number, the more likely you are to repay money you’ve borrowed (and vice-versa… the lower the score, the less likely you are to repay money you’ve borrowed).
What makes a credit score low? Foreclosures and bankruptcies are obvious examples, but do they stop you from buying a home for the rest of your life? Many people think so, but the truth is, depending on the loan program and the circumstances, you can buy a home 12 – 48 months after a bankruptcy is discharged and 3 – 5 years after a foreclosure is complete. FHA, Conventional, VA, and USDA (zero down) loans all have different guidelines regarding this, so be sure to explore all of your options and ask a lot of questions.
Even if you’ve had nothing so dramatic as a bankruptcy or foreclosure, you can have a low credit score. Collections are very damaging to your credit score, and it is frighteningly easy to find surprise collections on your credit report. Even if you have always paid every single bill you’ve ever received on-time or early and have never had any financial challenges, it’s a good idea to check your credit report once a year at Annual Credit Report to make sure there are no collections being reported to it or errors on it.
Other things that can lower your credit score are late payments. “Late”, for the purposes of credit reports, means 30 or more days after the due date. So, if your bill is due on November 12 and the creditor receives the payment on December 12, it is 30 days late and they will report it to the credit bureaus. This includes minor credit cards that may only have a minimum payment due of $10. Don’t ignore these! Late payments impact your credit, no matter how small.
Something that has an unexpected negative impact on your credit score is if you carry a balance on your credit cards that is greater than 50% of the available credit. In other words, if your limit is $5,000 and your balance is more than $2,500, it will cause your credit score to drop. The more available credit you have that you aren’t using, the higher your credit score.
Generally, your credit history will need to be clear of late payments or collections for the previous 12 months in order to qualify for a home loan. While this may not be true for every person in every situation, if you are thinking of purchasing a home it’s a good idea to start paying attention to what your credit report says and make sure there is nothing being reported to it that might negatively impact your score.
Thanks for tuning in! Next week I’ll explain what to do when you’re up to your eyeballs in debt!
But First, Get Pre-Approved 