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Credit Suicide
Few things influence the home buying process more than your
credit. I like how Clark Howard refers to the three credit
repositories as, "the three screw-ups". There is some validity to
that, and hopefully recent legislation will help clean up many of
the inaccuracies. Regardless, lenders need a source to determine
levels of risk for lending money? and the Fair Isaac Company is
where it lies. (Note: Fair was one of their last names? doesn't
necessarily denote fairness.)
There are close to 50 different things that influence your
credit; some good, some bad. Within those 50, there is some
14,000 variations?talk about a fragile balance! For example, did
you know that if you pay off a collection it might actually lower
your score! Don't worry most lenders don't know it either. Also,
beware of credit counseling services that promise all kinds of
miracles. The only things that can be legitimately removed from
your credit are things that are invalid, erroneous, or outdated.
Aside from that, if it is yours? it's yours. There may be ways to
"flower it up" but it isn't coming off. (Being intellectually
honest, you know it shouldn't either.)
If you are going to be hunting for a home, be sure to curtail
the temptation to go out make purchases that may affect you
credit. Obviously you wouldn't want to go buy a car, but other
things that may not be quite as obvious may be the purchase of
furniture or home improvement items that would need financing.
Chances are you may need these things, but wait till after
closing.
What is the biggest credit mistake?
You wouldn't believe how common it is! The biggest credit
mistake that most of us make is closing our old paid off credit
cards. I know that is seems like the right thing to do when you
pay off the balance but 15% of your FICO score is made up of your
credit history. If you close a credit card with no current
balance that you've had for years, you are getting rid of a lot
of your credit history.
Another 30% of your FICO score is made up by your Debt to
Credit Limit ratio. With this component, you show how well you
manage the credit extended to you by using it wisely and
judiciously. Let's say that you had two cards with $2,000 limits
and one was maxed out and the other one was just paid off. Well
you have $4,000 of credit extended to you and you're using almost
$2,000 of that credit (you don't want to go over 50%). Now you
cancel the paid off card and your new debt to credit limit ratio
is 100% ($2.000 out of $2000). Ouch, that hurt your credit
score.
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