Apr 07

Credit Scores - What they mean to you.

REAL ESTATE BEAT

Credit Scores – What It Means To You
 Written by Bill Barksdale

When you apply for a loan to purchase real estate, your lender will run a credit check on you.  One of the things they will want to know is your Credit Score.  Sometimes you’ll hear the term “FICO” score.  A FICO® score is a calculation developed by a company called the Fair Isaac Corporation back in the 1960’s.  The idea was to create a way to evaluate the credit worthiness of a borrower by examining data on how they handle money, particularly other people’s money – that is to say, CREDIT.

Your credit score will have a big impact on how much you will be able to borrow, and at what interest rate.  The score will also determine if credit will be extended to you at all.  One of the lender’s major concerns is determining the amount of risk they will assume if they loan money to you.  How likely are you to pay them back on time?  You need to understand how this score is determined if you want to borrow money.  Of course, credit score is not the only factor in determining credit worthiness, just one consideration.  Scores range from the 300’s (bad risk) to around 900 (solid gold).

Hang on and I’ll explain how it works, but first let me show you why it’s important.  If you were going to borrow, say, $200,000 today in California to purchase a home utilizing a 30 year fixed rate mortgage here’s how your credit score might effect your interest rate & monthly payment.

FICO Score      Annual Percentage Rate (APR)            Mo P&I Payment          Total Int paid in 30 years

620-639             6.319%                                        $1,240                                   $246,553

640-659             5.77%                                          $1,170                                   $221,088

660-679             5.337%                                        $1,115                                   $201,475

680-699             5.121%                                        $1,088                                   $191,853

700-759             4.943%                                        $1,067                                   $184,007

760-850             4.719%                                        $1,040                                   $174,242

 

Wow!  That’s a difference of $200.00 per month based on credit score.  The borrower with a lower score is paying about 29% more to borrow that $200,000 over the term of the loan in this example.

In today’s market most lenders want borrowers to have a minimum credit score of 620, some start at 660.  If your score is below that FHA (Federal Housing Administration) may have a loan program that works for you if your score is in the mid 500’s or better.  Lenders have different levels of acceptable risk for different credit products.

So here is how it works in general.  There are primarily three companies whose evaluations of your credit history are used in the calculation – Experian, TransUnion and Equifax.  Each company will look at the data it gathers on your credit history and it will generate a score.  Your lender will generally look at the middle score but now days they might also place additional value on that low score as well.

What data are they looking at?  The answer is, the list is as long as your arm but in general per Fair Isaac Corporation, they are looking at:  Your Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), New Credit (10%), Types of Credit Used (10%).

FICO is looking at events such as: past due payments, paid as agreed accounts, bankruptcy, account balances (are you maxed out or in balance), credit limits, number of recent inquiries (this can really effect your credit score so beware if you’re loan shopping), reestablishment of positive credit usage, etc.

If you are new to the credit establishment here are a few guidelines.  1) Never borrow more than you are sure you can pay back as agreed.  Avoid late payments, including on utilities, rent, etc.  2) As a rule, never borrow more on a credit card then you can pay back in full with the next payment.  This is a hard one for some people.  Get rid of the credit cards if you owe too much.  Learn to live within your means.  Pay what you owe, and then slowly start again.  3)  When starting out you may have to get a “secured” credit card, where you deposit say $1,000 in an account with a credit card limit of $500.  Pay it off in full each month. Eventually you can get a regular card if you want one.

You can get a free copy of your credit report to review, and you should do so on a regular basis.  Sometimes there are mistakes that need to be corrected and there are penalties to companies that don’t correct them, but they have to know there’s mistake and it takes effort on your part to fix it.

Shakespeare said “Neither a borrower or a lender be, for loan oft loses both itself and friend.”  That’s good advice, but I don’t know if it’s possible for most of us in our society.  So I’ll say, perhaps with less eloquence, don’t be a sucker.  If you use credit, use it with care, and take care of it.  Credit can open doors for you or close them.

ABOUT THE AUTHOR, Bill Barksdale: I have been selling real estate in the Willits/Mendocino Co. market for over 18 years. I can be reached at Coldwell Banker Mendo Realty Inc. PH: 707.459.8888 or Email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . I hope you will find my site (Bill Barksdale's Real Estate Site) of use to your home buying or selling a home now or in the future.

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