Understanding Your Credit

And Making The Most Of It. (Part 1)

Where do we begin? For most consumers, the world of credit is confusing and at times, seems almost without common sense. Credit plays an important role in your life. It affects the purchases you make and much more. Here are the basics, simply explained. Paying your bills on time is the single most important contributor to having good credit. No matter what the minimum payment is, it is critical that you always make all payments on time. Whether the minimum payment is $10 or $1,000, paying it late will negatively affect your credit. What does "late" really mean? Here's an example: Let's assume your latest monthly statement says a payment is due on the 1st of the month. There is almost always a grace period, which can be around 10 days. If you make the payment after the grace period, your credit provider will likely charge you a late fee. Does this hurt your overall credit or "credit score"? No. Even though they charged you a late fee, as long as you get your payment and late fee to the creditor within 30 days of the due date, which began on the 1st of the month, your credit will not get "dinged". In other words, no negatives. Creditors regularly supply your credit history to outside credit reporting agencies, also known as credit bureaus.

There are 3 main credit reporting agencies/credit bureaus, which are Experian (formerly TRW), Equifax and TransUnion. They are companies that collect (and sell) information about how people handle their credit. Their credit reports list how individuals manage their debts, make payments, how much untapped credit they have available and whether they have applied for any loans or other financing. The reports are made available to authorized individuals and creditors. Sometimes unauthorized individuals gain access to your information. We'll save that for a later date.

What is a credit score? The most well known type of credit score is the Fair Isaac or FICO score. Each of the 3 main agencies determine their own score and can provide it within their credit report. It is a number ranging from 300 to 900 which reflects the credit worthiness of the borrower. A credit score is primarily determined by the timeliness of past loan payments and balances owed in relation to the maximum credit limits available. Huh? What was that second part again? Let's say you have a credit card with a maximum credit limit of $4000. Owing less than 50% of that limit is a good thing. Owing any more will negatively affect your credit score. So, in this case, it is better to spread your debt around various other credit cards you have, rather than to have that one big balance. Keeping your credit cards with less than 50% of the limit is always a good idea, especially if you are planning to obtain more credit in the near future.

Most mortgage lenders will want to see all 3 reports and all 3 scores. If a single person is applying for a mortgage, lenders will typically use the middle number of the 3 scores. So, if your scores are 650, 698 and 735, they will grant you credit based on 698. With a married couple, they use the middle score of the greater income earner. The national credit score average is 678.

As always, if you need help or advice, just email Adam Ford of Mortgage Advisors Group at AdamFord@skylinefinancialcorp.com. More to come later!

[Adam Ford sent me this article for inclusion in The Real Blog]