Many future buyers focus on paying bills on time and paying off debt as their top two primary tasks with regards to credit in order to position themselves for better interest rates and loan approval. As well, borrowers today are very much aware of the importance of a high credit score, but many don’t know that it is possible to pay all your bills on-time and still have a low credit score.
Future homeowners are correct in focusing on paying bills on time because, according to Experian, payment history makes up 35 percent of your score. The category most are not aware of makes up a meaty 30 percent and that is the amounts owed, specifically how much of your available credit you are using on your credit cards. This means you can pay your bills on-time but if you borrow almost all of your credit limit on a credit card and still pay on-time, your score will drop.
This is a very important and difficult issue because many future homebuyers are young and turn to a credit card to establish credit. They also don’t want a lot of credit so they get a credit card with a low limit of $250.00 and charge it up, not realizing their monthly payments are actually doing damage to their credit score. By the way, length of credit history accounts for 15 percent of your credit score and new credit accounts for another 10 percent. If you are a young person these three categories make up 55 percent of your score.
The key is not to go over 65-70 percent of your limit. If you exceed that range, then your credit score will go higher. Consulting a mortgage professional before getting started so you are doing all the right things will help ensure you’ll be able to buy that dream home in the future.
If you have questions about credit scoring or need help with financing, call or text Mike Stoffer (NMLS# 373858) of Stoffer Mortgage at (330) 936-2312.
