Let’s Get Down to Basics: Credit Scores and You
If you are looking for a home in the Encino, Sherman Oaks, or Studio City area, you are aware that they cost a lot. Additionally, unless you are one of the very lucky few, you do not have enough liquid assets to purchase those homes outright. Therefore, we can safely conclude that if you are looking for a home in the Encino, Sherman Oaks, or Studio City area, you will likely need a loan to make that purchase; banks don’t give loans out to people with sub-par credit scores (for the most part). This article will briefly address various methods of increasing your credit score, so that you can get the loan for your dream home.
Who Calculates the Credit Score Banks Use for Determining Who to Loan To?
There are three major credit reporting agencies (“CRAs”): TransUnion, Experian, and Equifax. Each CRA has a slightly different metric for calculating an individual’s credit score, but the scores themselves remain fairly confident across all three CRAS.
What Factors Go into Calculating My Credit Score?
As noted above, the three major CRAs have slightly different metrics for calculating a credit score. For example, TransUnion takes your employment history into account, while Experian includes your history of making rent payments. However, the major components of calculating a credit score remain fairly constant across all three CRAs.
- History of Making Payments on Credit: Anything you have purchased on credit (like a car) fits into this category. Roughly 35% of your credit score is based on your history of making timely payments on credit.
- Debt-to-Credit Ratio: As it relates to credit cards, you should pay close attention to your balance in relation to your credit limit. You want to have some money owing on your lines of credit but do your best not to let the ratio exceed 30% of your balance; keeping a health debt-to-credit ratio accounts for roughly 30% of your credit score.
- Credit History: It should be common sense, but banks would prefer to make loans to people who have a long history of obtaining credit, and then paying that credit off; past behavior predicts future behavior. A lengthy credit history accounts for roughly 15% of your credit score.
- Variance in Types of Credit: You will want to have various types of credit in your credit history. A smattering of credit cards, store credit cards, and car loans; this represents approximately 10% of your credit score.
- New Accounts: Opening new lines of credit can increase your debt-to-credit ratio; it makes sense that if your credit limit increases, but your debt stays the same, then your debt-to-credit ratio has decreased. This can also cut against you though, as each new line of credit simultaneously reduces the average length of credit history. New credit activity represents approximately 10% of your credit score.
How Do I Obtain My Credit Score, for Free?
If you don’t actually know what your credit score is, don’t worry – that’s surprisingly common. In fact, it is so common that the magic of capitalism has created a solution. Thanks to CreditKarma.com, you can check your credit score for free. Naturally, your credit card company may also provide this information.
What Credit Score Should I Aim for?
Credit scores can go as low as 300, and as high as 850; you should shoot for perfection, so try to get to 850. However, there are several levels in between the absolute worst and the absolute best.
Perfect: As we noted, 850 is a perfect credit score;
Excellent: If your credit score is between 760 and 849, you’re doing excellent.
Good: A credit score between 700 and 759 is slightly above average.
Fair: If your credit score is between 650 and 699, you’re in the middle of the pack.
Low: If your credit score is below 650, it needs work.
What Score do I Need for a House?
Like all things, there is variation between entities, but lenders will generally look for credit scores of 660 or higher; the lower your rate, the higher the interest rates. If you want to lock the best rates in, you will want to have a credit score that is higher than 740… put differently, if you want an excellent loan you better have an excellent credit score.
At the Chernov Team we understand all things real-estate, even things as seemingly remote as the interplay between your credit score and your actual purchasing power. Let’s be fair, a difference of 1% on interest rates might not seem like a lot, but it translates to a significant chunk of change over time. We also take pride in helping our clientele obtain their dream homes, which sometimes means providing our clients with a plan of attack that will make their dream home affordable. In our next article, we will discuss how to increase your credit score. At the Chernov Team, we understand that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.