Real Estate Insights

Due to the current financial crisis, credit card carriers to mortgage providers are upping their credit standards and making it harder for consumers to qualify for an extension of credit.  It only seems timely that I spend this blog on reminding everyone the importance of actively managing your credit. 

First of all, active credit management does not mean the process of transferring credit card balances from credit card to another in order to get lower rates or even rewards points – that is debt management which is another important topic - rather if you are working on maintaining a higher credit score for an upcoming home purchase, or other purchase that requires high credit scores, then please pay attention:

How is your credit scores calculated? A consumer credit score is made up of five key components:

1. Payment History - 35% Types of accounts (credit card, mortgage, etc.), accounts paid as agreed, number of past due accounts, etc.

Be sure that you make all your payments in a timely manner. This is incredibly important in applying for new credit these days. If you have trouble remembering to pay some credit card bills or student loans on time, then be sure to take advantage of an automatic debit that can authorize your bank to make pre-determined monthly payments.

Be careful with auto debits though, if you happen to spend more on your credit card be sure to double check the monthly amount being transferred monthly is enough to cover the minimum payments. And sometimes, if your bank account does not have a large enough balance to cover the payment the auto payment will not be made.

And if a payment is missed, some creditors may allow a one-time exception and may delete a derogatory report from your credit history, but many do not. When you have a late payment the only thing that can heal your credit score is time – the more time that elapses form the missed payment date the less impact it will have on your score as you continue to maintain timely payments on all other debts.

2. Amounts Owed - 30% Balances of current loans, debt-to-credit ratio, proportion of installments still owed, etc.

Balances are another area where consumers can get into trouble. Many credit card holders may receive offers to transfer high balances over to another card fixed at a low interest rate – while it may make financial sense to save some interest it will actually have an adverse affect on your credit scores.

Using Balance Transfers Wisely - So if you are trying to maintain or increase your credit scores do not be tempted to transfer balances to a lower interest credit card because if you max out the credit line it will adversely affect your scores. And if you have to open a new account in order to transfer the balance, you will be hurt further by a credit inquiry and new account. But, if you already have a credit line maxed out, then transferring part of the balance to another card will help your scores. A general rule of thumb is to try to keep your credit card balances under 50% of the maximum credit limit available on the credit line.

3. Length of Credit History - 15% Time since accounts opened, last activity, etc.

This is another area of confusion; length of accounts is on of the most crucial yet often overlooked part of your credit score. The credit reporting bureaus want to see consumers establish long standing credit lines to prove that they can properly maintain credit. The bureaus give consumer tradlines with at least 5 years of seasoning (length of time you have had an active tradeline for) the highest points.

But if you do not use it then you loose it!  It is important to remember to charge these older credit lines at least once every few months in order to keep them active, since inactive accounts will not give you any positive points (or take any way either) and they also will not continue to season.

Think twice before closing your credit lines!!  Do not payoff old credit cards with new cards if you have the intention of closing the old credit account – once the account has been closed, you just lost that many years of credit history – which is not easy to rebuild.

4. New Credit - 10% Recent inquiries, new accounts, etc.

Be careful when opening any New Accounts before your purchase! New accounts need time to properly season – the bureaus need to make sure that you can manage any new accounts (increases to your credit liability) and will generally not provide positive points to newer accounts until they have at least 12 months of payments history reported to the bureaus. 

Credit Inquiries - When new accounts are opened the creditors will check your credit, which is called a credit inquiry. Many times credit inquiries will drop your score 10-15 pts for each new inquiry over a 3 month period. Consumer inquires affect your credit the most – these are credit checks for credit cards and other revolving debts (debts in which the credit balance can fluctuate based on your spending). Mortgage inquiries generally impact your score the least as the bureaus understand that consumers need to be able to shop for such a large purchase.

Be Wary of Department Store Credit Cards - Be mindful of this when you are constantly being offered new credit card accounts through department stores in order to save 10-15% off your purchases. Also, department store credit cards usually carry the highest interest rate terms – stick to your established credit cards, most major credit card carriers offer rewards programs that will go a lot further then saving a mere 10-15% off your purchase.

5. Types of Credit Used - 10% Mortgages, credit, retail, etc.

The credit bureaus want to see that savvy consumers are rewarded versus frivolous spenders. In other words, the bureaus are looking for a good mix of trade lines on your credit report i.e., more major credit cards than small department store cards, keep institutional loans (auto loans, student loans, etc.) for the full term of the loan, and do not co-sign for friends or relatives.

The larger the credit line, such as a mortgage or car loan, the more points you will eventually gain as you slowly pay off the loan over 5 or more years.

Please see my website for further details on how you can increase your credit scores - http://www.eaglefinancialgrp.com/ImproveYourCreditScore