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Focus your attention on CREDIT

Credit has been making headlines recently and is quite a serious subject.  With many homes turning to short sales and foreclosures, some homeowners don’t realize the huge impact that a short sale or foreclosure can have on their credit and subsequently their future buying power.

In a recent article by Strategic Equity, Dave Muti, author of “Mortgages:  What You Need to Know,” was asked how a credit score is calculated and tips for increasing it. The Fair Isaac Corporation created the most common credit score used today – the FICO score.  It ranges between 350 and 850.  The higher the score, the better the interest rate you can secure.  720 is the credit score threshold that you don’t want to drop below in order to secure the best rates.  If you drop below 500, you may not even be able to secure a mortgage.

The following are five critical credit criteria reported in the article:

1. Payment History – This pertains to your track record for paying your bills. It makes up 35% of your score. Essentially, this means paying your bills on time. A mortgage “late” is much more serious than a credit card “late”
2. Credit Ratio – How much you owe is 30% of your score. Just because you owe less does not translate to having a better score.  This score is determined between the various types of credit you have opened (see #3 below). There needs to be a balance between how much you owe and how much you have available to you.  Having too many credit cards can be a negative and having only one could be as well. The goal is to have a lot of credit available to you, and to then use that credit, while at the same time not maintaining a high balance.
3. Credit Type – The type of accounts you have makes up 10%. These are mortgage, car loans and credit cards.
4. Credit Maturity – The length of time you have maintained your individual credit accounts is 15% of your score.  This does not mean how long you have been involved with credit.  It is specific to each individual account and the length of time that you have maintained each particular account is the key.
5. New Credit – recent history makes up 10% of your score. 

The bottom line is to be proactive in maintaining your credit.  Plan ahead and check your scores at least two times a year.  It is important to think carefully about all of your financial moves in order to maintain and build your credit score.  That score can be a gateway to many things we all would like to obtain in life.

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