Improving your FICO / Credit Scores
Improving your FICO / Credit Scores
For a long time, longer than I care to remember, FICO Scores aka credit scores have been an super secret formula where only the credit reporting bureaus (Experian, Transunion, Equifax) knew how they worked. This, of course, is because they are the ones who created the system. For too long, we all wondered how to improve our credit scores while mortgage professionals tripped over themselves trying to provide a homebuyer a logical answer. However, it still remains a complex formula based on factors that we likely will never know how they actually work.
Getting and maintaining good credit isn’t rocket science, we just need to pay our bills on time, keep our balances low and sparingly take on new debt.
Bankruptcy
FICO’s information demonstrates that a bankruptcy tends to do the most damage to a person’s scores. I can damage scores up to 240 points.
Credit Card/ Revolving Debt
Those with good or excellent credit – aka Prime Borrowers – put their scores at risk with a simple mistake. For example, someone with an average score of 680 who might make a payment 30 days late can experience a 60 to 80 point drop in their score. However, someone with an excellent score of 780 – that same late payment can plummet their score by 90 to 100 points.
It Can Cost You Money
Just how badly a drop in your FICO score can hurt you financially is explained from studies made from the home mortgage, auto loan, and the credit card industries. Studies were made based on hypothetical scenarios of a consumer who applies for a $200,000, 30 year mortgage and a $20,00 auto loan. The industry stressed that the FICO score isn’t the only factor in determining who gets credit and at what cost and rate (such as debt to income ratio, relationship with the lender, etc.), they were able to provide an idea of what a borrower who had the following credit scores could expect:
For a Consumer with a FICO Score of 780:
- Following a 30 day late, the consumer’s car loan rate would jump nearly 3 percent costing the borrower approximately $26 more each month.
- After a debt settlement, the consumer would pay as much as $109 more each month on a home mortgage.
For a Consumer with a FICO Score of 780:
- Following a 30 day late payment, the consumer would pay $41 more each month for a car.
- After a 30 day late payment, the consumer would pay as much as $95 more each month on a home mortgage.
- Following a debt settlement, the consumer would not qualify for a credit card
Of course, knowing the impact on a FICO score and actually avoiding these mistakes are two separate things. Amid rising unemployment and other daily financial struggles, paying bills and staying on-track financially becomes a much bigger challenge for many borrowers.
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With 11 years in the lending industry, Ted is proficient in structuring the client’s loan to ensure that the client obtains the best financing. He has become a recognized leader in real estate education and hosts real estate seminars for his clients and the business communities in the Southwest. His attention to the details and in-depth knowledge of the loan process ensures that you are getting the best service possible.
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