Why Your Credit Score Is So Important

The credit scoring model seeks to quantify the likelihood of a consumer to pay off debt without being more than 90 days late at any time in the future.  Credit scores can range between a low score of 350 and a high score of 850.  The higher the score, the better it is for the consumer, because a high credit score translates into a low interest rate.  This can save literally thousands of dollars in financing fees over the life of the loan.                                                                                                                                                             Only one out of 1,300  people in the United States have a credit score above 800.  These are people with a stellar credit rating that get the best interest rates.  On the other hand, one out of every eight prospective home buyers is faced with the possibility that they may not qualify for the home loan they want because they have a score falling between 500 and 600. 

The Five Factors of Credit Scoring

 Credit scores are comprised of five factors.  Points are awarded for each component, and a high score is most favorable.  The factors are listed below in order of importance.

1. PAYMENT HISTORY-35% IMPACT

Paying debt on time and in full has the greatest impact on your credit score.  Late payments, judgments, and charge-offs all have a negative impact.  Missing a high payment will have a more severe impact than missing a low payment and delinquencies that have occurred in the last two years carry more weight than older items.

2. OUTSTANDING CREDIT BALANCES-30%

IMPACT

This factor marks the difference between the outstanding balance and available credit.  Ideally, the consumer should make an effort to keep balances as close to zero as possible, and defiantly below 30% of the available credit limit when trying to purchase a home.

 3. CREDIT HISTORY-15% IMPACT

This portion of the credit score indicates the length of time since a particular credit line was established.  A seasoned borrower will always be stronger in this area.

 4. TYPE OF CREDIT-10% IMPACT

A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only.

 5. INQUIRIES-10% IMPACT

This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a six month period.  Each hard inquiry can cost from 2 to 25 points on a credit score, but the maximum number of inquiries that will reduce the credit score is ten.  In other words, 11 or more inquiries within a six month period will have no more impact on the borrower’s credit score.  Note that if you run a credit report on yourself, it will have no affect on your score.

Remember that the credit score is a computerized calculation.  Personal factors are not taken into consideration when a credit report is generated.  It is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.

With all the news stories the past couple of months about the rate reductions, you would think buying a home or refinancing in the current financial market should be cheaper than buying a burger for dinner.  So is it??????  NOOOOOOOO, try again!

The plain hard fact is that with all the rate cuts by The Fed,  the consumer doesn’t seem to be seeing the benefit of the cuts.  Why is that?  Well, really there are a lot of complicated reasons but the quick easy answer is this.  The investors who purchase the loans on Wall Street are looking for a higher return on their investment now that the investment itself seems more risky.  Therefore, the lenders that make the loans are charging a higher rate in order to sell those loans on Wall Street.

The other piece of news is that The Fed has signaled that as soon as they feel that inflation is becoming a danger, they will reverse those cuts as quickly as they gave them.  The wild card is what the rates will do.  Hard to tell in this market but it makes sense that they would have to go up too.  I guess only time will tell……Continue to feel that you can contact me with any questions or problems that you might have!!