Alex Trebeck: “Its a three-digit number that carries a lot of influence over your future. It can dictate whether or not you'll qualify for a home, car, or business loan. It can also be the deciding factor in whether or not you qualify for a low interest rate, or no loan at all.”
Informed Contestant: “What is a credit score, Alex?”
OK, sorry for the TV drama, but I'm out of town this week, doing a little drift fishing in Montana and Idaho. And I thought a little primer on credit scores might be appropriate. Credit scores are created by witch doctors using complicated algorithms and there are a whole flock of factors that can contribute to its number.
To keep this column short and sweet I will assume you already know that a credit score is a number from 200 to 800 that reflects your payment and borrowing history. Your credit score will be modified down if you are a big spender, and up if you make payments faithfully and on time. These are some of the things that lenders use to decide a number of factors, including whether or not to lend any money at all to you.
There are three main reporting agencies: TransUnion, Experian, and Equifax. They claim to have different ways to assess your credit and assign credit scores to each and every American—but oddly their scores for any one of us are usually pretty close.
Can a credit score from these agencies be biased? The simple answer is no. Your credit score is a true and honest reflection of your debt and payment history. This means that neither a lender nor credit agency can "have it in for you." You are the only person responsible for your score. This is their way of saying if your score is low, it's your fault.
Here are some of the factors that contribute to your score:
Lenders want to see that you have a history of multiple types of credit. This can include credit cards, installment loans, and mortgages. You will have a higher score if you can demonstrate that over time you have managed credit and made timely payments.
The more debt you have the riskier you appear to a lender. This means paying down or off debt is a great way to make yourself more desirable for a home loan. But before you scream, discuss your own credit history with a lender. You may find that you can raise your credit score by canceling a few old cards (maybe even ones you forgot you even had), and by moving some debt from smaller cards to one main card with a lower (even an introductory) rate. Lenders who see that you have five credit cards, each with a ceiling of $10,000, will assume that at some point you might owe $50,000. That will cause them to think twice about lending you a mortgage.
You want to be on time with every bill. This includes everything from cable and phone to credit card payments. Late payments may be reported to the credit reporting agencies and will negatively affect your score. Even small amounts need to be paid—I once had an auto insurance policy that was billed to me monthly, I paid them in advance every three months because it was easier, but it showed up that I wasn't making timely payments. So be careful...
Do NOT under any circumstances open any new lines of credit, no matter how small, before you start looking for a home, nor even if you have found a home but not closed yet. Any new lines of credit will dock your score and may indicate to a lender that you are on a spending spree. Folks who arrive at the closing table in a newly financed car, may find they no longer qualify for their mortgage.
Younger borrowers are always at a slight disadvantage because they have a shorter credit history. A longer credit history gives lenders a better picture of what kind of borrower you really are.
Be sure to check out your credit report three times a year at annualcreditreport.com. It's free, easy, and secure. You'll have to pay a nominal fee in order to see your score, but checking out your report can help you assess areas that need improvement or areas that have errors which need corrected.
Dane Hahn is a real estate professional practicing in Englewood and Sarasota. He can be reached at dane.hahn@gmail.com. You can see him on the web at www.danesellsflorida.com.