Understanding Credit Scores (Pt 2)

In the fist blog we looked at the five criteria for evaluation that is used to establish a consumer’s credit score, but there are other factors that a consumer needs to know to better understand credit scores and scoring.

Factors that do not impact a person’s credit score include age, salary, race, education, and religion.  Consumers should check their credit reports at least once annually in order to be sure that it remains healthy and free of errors.  If problems exist here are some tips for improving that score.

A borrower should always pay their bills on time; late payments can cause serious damage to a credit score especially if it is a repeated pattern.  If the borrower has an existing mortgage they should contact their lender immediately if they are having trouble meeting their payments, and they should not forget to contact their other creditors as well.

If a borrower does become late in payments they should do their utmost to be sure that none of these debt accounts goes to collections.  Once an item goes to collections it stays in the file for seven years.

Use existing credit wisely.   Borrowers should try to pay down credit cards if at all possible. Carrying high balances on credit cards can severely affect ones credit score. Ideally a consumer should owe no more than 30% of an existing credit limit.  This shows lenders that the consumer has viable credit and knows how use it wisely without over extending themselves.  Consumers often, and erroneously, believe that completely paying off credit cards will improve their credit scores; it can have the opposite effect.

The 30-percent rule also is a good target for consumers relative to their over all monthly debt obligations compared to their income.

Consumers should not make the mistake of opening new credit accounts just prior to applying for a home loan.  Buying new furniture, home appliances or even a new auto on credit is one of the surest ways to damage a credit score, at least temporarily, prior to applying for that home mortgage.