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Your Credit and You!
Now that you have an idea of the factors that impact your credit, let’s take a look at the next category.
Amount Owed:
The amount of money you owe also factors into the information your lender evaluates. It is important to demonstrate you know how to use credit wisely and you are not credit dependent. It is never wise to have balances on revolving accounts that exceed 70% of your allowable limit. It is best to not exceed 50%.
You can manage this in a couple of ways. First, pay off the balances on your revolving accounts monthly. Second, know when your accounts report to credit and pay in time for your payment to post prior to reporting. It is always to your advantage to report the lowest possible balance on revolving accounts.
Having too much open credit can also lower your score, even if you pay every account on time. There is no science to determining how much is too much, so open credit accounts wisely. Too many open accounts can give the appearance of having the ability to over extend yourself; which makes you a higher credit risk on a home loan.
Paying down installment loans, like auto or student loans also demonstrates your ability to manage and repay debt. Once your balance drops below 80%, these items will have a positive impact on your credit score.
Overall, you want to keep accounts active with small balances. This will have a more positive impact on your score than keeping accounts with no balances. Keep in mind that closing accounts will not generally raise your score if you have a multitude of credit open.
The amount you owe will have a direct affect on the amount you will qualify for when applying for a home loan. These items will all comprise your Debt-to-Income Ratio. Most lenders will require to you be at 40% D-T-I based on your gross income.
If you have a high D-T-I, you may need to pay off debt before you will quality. The waterfall affect in paying off debt can be the most productive path for achieving that goal. “Waterfalling” means to take your lowest balance and pay off the debt, then take that amount and apply it along with your regular payment to your next bill.
Next time we’ll look at how the duration of your credit history impacts your score.
Previous Posts by Anza:
Written by Anza Goodbar, President of Clearview Mortgage Have a question? Contact Anza
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