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Understanding Credit Rating

 

Credit rating has an enormous impact on your ability to obtain a good interest rate on your mortgage, and may even determine whether you qualify for a mortgage at all. Good credit translates into lower interest rates for borrowers so it is imperative for anyone seeking a mortgage to understand the five factors which impact their credit score. Credit scoring seeks to quantify the likelihood of a borrower paying off their debt without being more than 90 days late on a payment at any time in the future. Credit scores typically range from a low of 300 to a high of 850. Higher scores indicate a lower probability of default on a loan. Scores over 800 are rare, applying to less than 0.1% of the general population, and these are the people who will easily walk away with the best interest rates. On the other hand more than 10% of prospective home buyers are faced with a possibility of not qualifying for the loan they want. Your credit score is built on the basis of five factors:

720+Wonderful: expect the best terms and rates
700-719Excellent: a very desirable borrower
680-699Good: in fine shape to buy
660-679OK: don't expect any special treatment
640-659Borderline: OK even if some other things are wrong
620-639Weak: OK if everything else is perfect
600-619Difficult: extra work or special help needed
599-Trouble: you need to get your credit fixed
  • Payment History: 35% impact. Paying your debt on time and in full helps. Late payment, judgments and charge-offs are detriments. Missing a large payment is worse than missing a small one.
  • Outstanding Balances: 30% impact. What matters here is the ratio between the outstanding balance and the available credit. Ideally your balance should be less than 10% of your available credit. Maxing out your cards is not a good idea.
  • Credit History: 15% impact. In other words, how long you have held any particular line of credit. A seasoned borrower has a stronger credit history.
  • Type of Credit: 10% impact. A mix of loans - auto, credit cards, mortgages - is considered to be better than just debt from credit cards.
  • Enquiries: 10% impact. This is an evaluation of the number of enquiries made on your credit history in the past six months. Each enquiry can cost from 2 to 50 points on a credit score, but only the last ten enquiries count. Eleven or more in the last six months will have no additional impact.

It is important to remember that it is an impersonal, coldly calculating computer that figures out these scores. No personal factors are going to get considered. Your credit report will simply be a computerised snapshot of your credit profile at a given point in time. It can fluctuate dramatically in a short time depending on your credit related activities. Awareness of how your credit rating is derived can help you avoid activities which might adversely affect your score when making application for a mortgage. Understanding how credit scoring works can lead to strategies for improving your credit scoring prior to making a mortgage application. The outcome could be savings from a better interest rate, or just getting an otherwise unobtainable loan.

Sometimes a poor credit score has come about as the result of illness, a layoff, or a change of employment, but typically someone with a poor credit score lacks structure in their life. Discipline is needed to curb spending and ensure bills are paid in full and on time. The suggestions which follow are not a substitute for essentails of structure and discipline, but they may help someone benefit by moving up a step in their credit scoring:

  • If all your loans are on one card and you have several others with a zero balance, see about distributing the debt over all of the cards so the outstanding balances are improved.
  • Since credit history weights less than outstanding balances, in the above situation, if necessary you could apply for a few more cards to distribute the balance better. The negative impact of getting the cards and their lack of history will be more than outweighed by the improved credit margins.
  • Don't close existing card accounts, even if they have no balance or carry high interest rates. You may think it is a good idea to have fewer cards, but you will lose out on their credit history factor.
  • When seeking your loan it is a good idea to have a mortgage broker handle the matter with a few well placed enquiries to the lenders most likely to offer you the best rates. Shopping around for yourself can generate a flood of enquiries that lower your credit rating and may damage your prospects.

In some cases it may be advisable to seek professional assistance in credit repair. Self-help plans may be a cheaper option, but the majority of people with credit problems resulting from a lack of discipline are unlikely to have the diligence to research and remedy their own difficulties. In seeking out help, look for reputable organisations and avoid any which engage in fraudulent, deceptive or unfair practices. Particularly beware of those charging substantial fees 'up front' with no guarantee of tangible results. If you are unsure, ask for advice from your mortgage broker, financial advisor, banker, lawyer or Realtor.

 

Site owner: Dot Turner, Sales Representative, Team Realty K W Inc, Brokerage 519-741-1400

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