Let’s talk about CREDIT!
As a Mortgage Broker, I hear a lot of concerns about credit—a topic many folks wish they knew more about before jumping into big purchases like cars or homes. Our education system doesn’t really cover credit, does it? I mean, most of us got our first credit card offers in college or university when we barely had an income. Then later, trying to get a car loan or mortgage was tough because our credit profile was less than stellar.
There’s so much confusion about credit scores and how they affect getting a mortgage. So, let’s break down what really matters for your credit score and talk about how to keep it healthy.
Credit Utilization - 30% of Your Score
This one’s a big deal, making up 30% of your overall credit score. It’s about how you handle the credit you’ve got. If you max out your credit card every month, it’s going to hurt your score big time. Lenders want to see you have access to credit but don’t need to use it all up. For instance, having a credit card with a $4,000 limit and a $3,000 balance is worse for your score than having a $10,000 limit and a $3,000 balance. It’s not just about how much you owe, but how much you owe compared to your limit. Aim to keep your balance within 30-50% of your limit—it shows you handle your credit responsibly, which lenders love.
Payment History - 35% of Your Score
This one’s the heavyweight, making up 35% of your score. Paying your bills on time, every time is crucial. Even one late payment can ding your score, and if you’re late often, it can really mess things up. Late payments can stick around and hurt your credit for years. Lenders want to see you’re reliable with your payments every single month.
Length of Credit History - 15% of Your Score
Lenders like to see you’ve been using credit responsibly for a while. It shows them you’re stable. So, think twice before closing old accounts or opening new ones all the time. The rule of thumb is to have at least two active credit accounts (like a car loan and credit card) for at least two years each, with a minimum $2,000 limit. This is the rule of 2’s in the mortgage world. Many lender won’t even consider you for a loan until your credit report shows this credit history.
Inquiries - 10% of Your Score
Worried that checking your credit too often will hurt your score? Don’t stress too much. Inquiries only make up 10% of your score. If you’re shopping around for a car or mortgage, multiple checks within a short time (45 days) count as one inquiry. But if you’re applying for a car, mortgage, and a new credit card all at once, that’s different—each one counts separately and can hurt your score significantly.
Types of Credit - 10% of Your Score
Having a mix of credit—credit cards, loans, maybe even a mortgage—can actually boost your score. It shows you can handle different kinds of debt responsibly. Just be cautious about taking on new credit just for the sake of it—having too much credit can drag your score down.
Understanding Credit Scores
When it comes to mortgages, having a score above 680 usually gets you the best rates and terms. Below that, you might pay more interest or need a bigger down payment. Keep in mind, different lenders use different scoring systems, so your score can vary.
Keeping an eye on your credit and understanding these factors can really make a difference. Got questions about mortgages or improving your credit? Give me a call at 250-328-4245 or shoot me an email at trish@my-mtg.com. I’m here to help with any questions you’ve got!