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Health & Fitness

How Important is Credit?

Is credit really that important? Paying cash is great, but it doesn't help you get that Mortgage or Car Loan or Credit Card.

How important is credit when you want to buy a home?

Ask anyone that has a low credit score how it feels to be told, "you don't qualify for a loan based on your poor credit"!  Credit is the “it factor” in today's financial world.  Want to buy a car?  You need good credit.  Want to get a credit card?  You need good credit! Want to buy a home?  You really need good credit!

Positive credit is a hot topic! For decades, most people associated good credit scores with purchasing high-ticket items (new car or home.)  Positive credit actually affects the ability to get approved to purchase items on credit, even auto insurance, cell phones and getting hired for a new job!


Now is the time to develop positive credit habits!  You need to continuously make your payments on time, all the time!  Make your minimum payment on time, or even early if possible.  You do not need to pay more than the minimum if it's not affordable to.  If you can pay more, do so as it lowers the total interest you are paying back for borrowing that money!  The higher the credit score, the lower interest rate you will pay.


Your credit scores are determined by three separate Credit Reporting Agencies; Equifax, Trans Union and Experian.  Some Creditors report to all 3, some only report to 1 or 2, and some may not report at all!  The credit score system used today has been evolving since the 1960’s.  This system was originally designed to provide lenders with Financial Profiles on prospective consumers applying to borrow money.  The Lender’s biggest concern was whether or not the individual had the “ability to repay the loan” and establish the percentage of risk that may be involved (based on the history of payments).

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Congress passed the Fair Credit Reporting Act (FCRA) in 1971 to establish guidelines for fair practices in regards to the use of credit scoring.  This Law was designed to promote consistent accuracy in reporting and protect the privacy of consumers.  Due to increased use of credit scoring and fear of identity theft, additional legislation has been passed to further protect consumers.

The 5 factors that make up your Credit Scores:

Payment History (35%)

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By paying your debts on time and in full has the highest, positive impact on credit score. Late payments, judgments, tax liens, collections and charge-offs all have negative effects and will lower your credit score.  Missing a high payment will have a more severe impact on scores than missing a small payment.  Also any  delinquencies (lates) in the past 2 years will weigh heavier on scores than older late items.

Outstanding Credit Balance (30%)

30% is the magic number!  Keep your balance (usage) of the credit line at 30% or less to have a more positive effect on scores (example: if you have a $1000 credit line, use $300 or less. The more you use, the higher the risk of repayment is, so your scores may lower).  From time to time you may need to use your full credit line.  That is fine; just pay it down as soon as possible to positively effect your scoring.

Credit History (15%)

This portion of the credit score indicates the length of time since a particular line of credit; auto loan or mortgage has been established. A seasoned borrower will always score higher in this area, as there is a longer track record of payment history. In other words, the longer you have a particular loan or credit card and use it positively, the higher your scores will be.

Type of Credit (10%)

A mix of credit cards, auto loans and mortgage is more positive than only credit card debt.

Inquiries (10%)

This percentage reflects the number of inquiries made on your credit reports over the past 6 months from the date of the new “pull” of your current reports.  Each hard inquiry can affect your scores from 2-25 points.  But, the maximum number of inquiries that can affect your score is 10.  In other words, if you have 11, 12 or 13 inquiries in a 6-month period, you scoring will not be affected any more than it did when the 10th inquiry was pulled.  If you pull your own credit reports, it will not affect your credit scores at all.

Please remember your credit scores are a computerized calculation. There are no personal factors taken into consideration when a credit report is generated.  The report is merely a snapshot of today’s current credit profile for any given Borrower.  Scores can dramatically fluctuate within the course of the week depending on many factors.

Does Low Credit Scores affect MY Interest Rate?

You bet it does!  Lenders will estimate your ability to pay back money based on your credit scores.  The risk factor they take on by borrowing you money is built-in to your interest rate as a “financing fee”.  A Low Credit Score results in a higher interest rate.  High Credit Scores will result in a lower rate, which will save you a lot of interest over the term a loan and keep more money in your pocket!

How will Credit Repair help me?

Have you looked at your credit report lately? 

If not, go to www.annualcreditreport.com andget a free copy of your report.  Review the report.  Is everything perfect?  Anything in error, something listed is not yours?  If so, these items may need to be updated or “repaired” by a Credit Repair Specialist.

Maintaining positive credit habits will greatly improve your ability to get approved for a home loan at a low interest rate that you truly deserve!

Steven Goldman

 

 

 

 

 

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