A strong credit score has become more important than ever due to these uncertain economic times. Restrictions for lenders have gotten a lot tighter since the mortgage meltdown. There’s no way of getting around it anymore – if you have bad credit, you won’t be eligible for a home loan.
So you’re probably wondering, “So Jay Farner, why is my credit score so important? And how is it determined?”
At its basic level, a credit score is the number that indicates to lenders and creditors how likely you are to pay back the debt you owe. The score is essentially based on your borrowing history. It will determine if you are eligible for a loan to buy a home, car, or finance your college tuition.
How do you know if you have a good credit score?
Scores range from roughly 300 to 900, with the average credit score in America being at about 693 according to Experian. Generally, if you have between 660 and 719 you’re in good shape. Pay extra attention if you begin to fall below 620, as it will be extremely difficult to qualify for any loan with this bad of credit. 720 and above means you have excellent credit!
What’s in a Credit Score?
While the exact formula to calculating a credit score is still unknown by the general public, we do know what your score is comprised of from a general standpoint.
• Timeliness of payments = 35%
• Amount of debt in relation to the amount of your total credit = 30%
• Length of credit history = 15%
• Type of credit in use (installment loans, revolving, department store cards, etc.) = 10%
Bankruptcies, foreclosures, and other judgments are all blemishes that can negatively impact your score. The more of these problems you have, the more lenders are reluctant to offer you a low interest rate.
Tips From Jay Farner: Boost Your Score
The higher your credit score, the more home loan options will become available to you once you decide to purchase a home or refinance. Also, the higher your score the better chance you have of locking-in a low monthly mortgage payment.
So what can you do to make sure you can qualify for the best possible mortgage rate?
Pay your bills on time. The more you pay your bills on time, the more it proves to lenders that you are financially trustworthy and have learned to manage your finances.
Double-check your score. Often, you may discover your name is misspelled or find an account you closed still being reported as open. Verify that all your information is accurate.
Stay out of credit card debt. Running up high balances and then closing accounts will lower your credit score. Keep a healthy debt-to-income ratio (DTI) and you should be fine.
Don’t move your debt around – just pay it off. Don’t prolong paying off your debt by moving it around. That does nothing. Raise your credit score by paying off what you can to prove to lenders you are financially sound.
Keeping a healthy credit score is a great advantage in time of economic uncertainty. Getting through these difficult times will be much easier if you manage your debt wisely and stay financially sound.
If you need help monitoring your credit report, there are a number of free online services that you can utilize. Check them out for yourself and take control of your finances.
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