How Credit Works

Let’s talk about credit. This is an education on your credit and how your credit score is derived.

  • There are 55 different algorithms that create your credit score.
  • Mortgage/auto/credit cards- all have different algorithms or formulas to create the credit scores.
  • Mortgage = biggest debt has the strictest algorithm to calculate your score.  
  • Credit karma is typically different than what a lender sees.

Tip #1: 30% of your score is available credit or revolving credit

  • If balance is 50% over the limit it negatively affects your score.
  • Ideally below 30 percent at all times.
  • We have simulators that we can run and tell you that if you pay down a particular credit card this is what it projects as far as where your credit score would go to.
  • Doesn’t matter if you have a $5,000 credit card or a $500 credit card. They are all weighted the same.

Tip #2: 35% of your score is based on credit history

  • Make your payments on time!
  • Make your payments on time!
  • Make your payments on time!
  • Enough said.

Tip #3: Installment Debts

  • Installment debts like cars don’t have that big of an effect on your credit as long as you’re not late on that installment debt.
  • After 12 months of on time payments, that’s when it actually helps out your score, but not as much as the credit cards

Tip #4: Collections & Medical Collections

  • One of the biggest mistakes is when people try to contact the collection agencies themselves.
  • Collections may or may not be affecting your score- but when you contact them it reports a Recent Activity on a negative account and that will decrease your score

Tip #5: Let us pull your credit

  • One of the biggest myths in our industry and that is having your credit pulled is a bad thing
  • People think a hard inquiry or “pull” will severely decrease your score
  • Our inquiry will only impact you by 3 points
  • Our FICO report will show things your consumer one won’t

Tip #6: Don’t try to fix it yourself

  • I am a mortgage professional. I look at thousands of credit reports every year.
  • We can look at it instantly and give you proper advice or refer you to a reputable professional credit repair company if necessary.
  • People often do more harm than good, like contacting old collections

So let us help you prepare to buy a home- it’s never too soon to get started!