First time home buyers: Credit score
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Many of my potential first time home buyers aren't quite ready yet to buy. Often I hear: I am working on my credit score. I did some research and here is what I learned:
Credit score is used by lenders to evaluate your credit worthiness. It's between 300 - 850. Your credit score (aka FICO score) influences the height of the interest rate you can qualify for and sometimes also the type of loan. Some loans require a credit score of at least 640. The higher your score, the better.
Factors that influence your credit score:
- Paying on time! The longer you pay on time, the better.
- Total amount owed.
How high your outstanding balance is on a card
in relationship to your entire credit line.
Scenario 1: Your credit line is $1000 and you owe $100.
Scenario 2: Your credit line is $10000 and you owe $500.
Scenario is better, even though you owe money, because the total outstanding payment is only 5% of the entire credit line vs 10% in the first scenario.
How to improve credit score:
- Make payments on time.
- If you can't make your student loan payment on time, call your lender and ask for a deferment (in most cases this will not hurt your credit score).
- It's OK to defer, but not default!
- Actually read your credit report and dispute errors with the credit bureau (knowledge is king!)
- Pay off the highest interest cards first!
- If possible, consolidate high interest cards to a low interest card.
- Don't close unused cards quite yet, but if you use them, always pay them off on time.
- Open a new card, use it for small amounts and (you probably know by now what I'm going to say: pay it ALWAYS off on time.
The above information was compiled from different online resources. Please go and consult a professional regarding your credit and credit score for detailed information and to set up a strategy.
If you'd like to talk more about buying or selling a home in the bay area, please contact me at 510.9696.444