Credit Do's and Don'ts

 When buying a house your Credit Score will determine how much money you can borrow as well as at what interest rate.  Your Interest Rate will make a huge difference on your monthly payment which is what most buyers are concerned with.  Unless you’re paying Cash, people will usually select their home based on how much money they have to write a check for every month rather than the actual purchase price.  If you have a $500,000 Mortgage, a 1% difference in your interest rate would be $1,048.62 per month you are paying for a total of $103,753.12 on a conventional 30 year loan. 

I won’t go into the obvious things that will have a negative effect on your credit score like Bankruptcy, Foreclosure or just say “Pay all your bills on time”.  Those are obvious.  Here are some unique things that many people don’t realize have a huge effect on their credit score.  What you don’t know CAN hurt you.

  1. Avoiding Credit

We have all herd the expression “Cash is King” but that’s not always the case.  If a consumer has a good job and no debt or credit cards, his/her credit score should be excellent, right? Unfortunately, no. Great credit scores only come from having and using an appropriate mix of credit products. Consumers who avoid credit products, out of prudence or for any other reason, can end up with a low score or a “thin file” (a credit report that does not have enough data to assign a score).  I had one client who considered “Only making $5Million” to be a bad year.  He paid cash for everything and didn’t even have a credit card.  He went to his bank to co-sign for a loan for his Niece to buy a house and his credit score was too low to qualify for a $150,000 loan even though he had over $10Million in the very same bank.  He had to open a separate savings account with $250,000 in it and use that account as collateral for the $150,000 loan.  He then took out a couple secured credit cards where he had to put up $25,000 each to get the credit account.

  1. Closing Unused Credit Card Accounts

A huge part of the consumer credit score — about 30 percent for both the FICO score and the VantageScore — is based on the amount of credit used in relation to the amount of credit available. This is called the debt utilization ratio. People with healthy credit scores keep their utilization under about 30 percent (they don’t charge more than 30 percent of their credit limit) and people with top credit scores keep it under 10 percent. The ratio is calculated for each account and overall. Closing an unused credit card account pushes the utilization up (for consumers who carry a balance).

Here’s an example: Joe has three credit cards. Card A has a $2,000 limit and a $1,000 balance (50 percent utilization). Card B has a $1,000 limit and a $300 balance (30 percent utilization). Card C has a $1,000 limit and isn’t carrying a balance (0 percent utilization). His overall utilization is 32.5 percent ($1,300 used, $4,000 available). If he shuts down Card C because he never uses it, his overall utilization jumps to 43.3 percent ($1,300 used, $3,000 available), likely resulting in a ding to his credit score.

Also closing out unused accounts will lessen your length of credit history.  How long you have had your credit affects your score.  Creditors know anyone planning on buying a house can be good for a year or two but they like to see longevity with good payment history.  I still have a Sunoco Gas Card I got when I was 18 years old.  The only time I ever see a Sunoco Station is when I travel but I make sure I charge something on it every time I see one and pay it off immediately.  I have an Equifax Credit Monitoring Account which tells positive and negative factors in my credit and that Sunoco Card always comes up as a positive factor.

  1. Taking Advantage of Credit Offers

Solicitations, ads and point-of-purchase credit offers pop up every day. But taking advantage of such offers causes a hit to the credit score each time. Ultimately, the cumulative reduction will be significant enough to result in denial of subsequent applications. That’s because for every application, the creditor initiates a hard inquiry into the consumer’s credit history. Every hard inquiry affects the score in two ways. One, it causes a minor dip to the score, and two, it’s a point against the maximum number of inquiries that a creditor allows in order to approve an application.  Also having too many credit cards (Lines of credit) will have a negative impact on your credit score.

  1. Consolidating Debt to a Low-Interest Card

This “gotcha” goes back to the utilization ratio, which has a big impact on your score. Even when a consumer’s other cards have zero balances, if any one credit card is maxed out, the score suffers. A debtor who is tempted to transfer several small, high-interest balances to a single card with more advantageous terms should know that doing so will cause the score to fall until the balance is brought down, even if the high balance is the only revolving debt.  Those “0% Interest for 18 Months” can greatly reduce your balance but only do that if you know you have the ability to pay the debt down in 6 to 8 months.  Also, only consolidate to one of those cards if you know you are not going to apply for a major credit line like a Mortgage or Car in the next 12 months.

  1. Someone Else’s Mistakes

One-fifth of Americans have errors on their credit reports, and 5 percent of consumers have errors that are significant enough to bring down the score. People with common names are particularly at risk of having items on their credit report that belong to someone else. Obtain your free credit report every four months from one of the three major credit reporting agencies (do so by visiting AnnualCreditReport.com) and follow the agency’s instructions to request correction of all errors, large and small. Success can be difficult to achieve but is worthwhile to pursue. Some persistent consumers have won judgments in court against credit reporting agencies that fail to correct errors in the manner prescribed by federal law.  If you dispute anything on your Credit Report the Credit Reporting Agency (Equifax, Experian, Trans Union) has 30 days from notice of your dispute to verify it is true and correct or remove it from your Credit Report.  The best way to dispute it is by certified return receipt mail.  That way you have proof of delivery.  The 30 days starts the day the letter is signed for even if it sits in their mailroom for a week.  You may have to send a separate letter to all three Credit Reporting Agencies but it is well worth the time.

  1. Starting Up a New Utility

Many cable TV, cell phone, landline, gas and electric providers run a credit check prior to starting a new service. Similar to a credit card application, this is a hard inquiry that lowers the credit score.  If you move residences and the same Utility Company services your new area be sure to tell them you want to transfer your current account to your new address not start a new account.  This will avoid a new inquiry on your credit as well as keep your longevity of the account as mentioned in Item number 2 above.

  1. Not having a mixture of credit sources

The types of credit you have accounts for the remaining 10% of your credit score. This includes credit cards, auto loans, mortgage loans — and having a healthy mix will insure you score well in this category. Having too many, or only one type of account can actually hurt you in this category. When it comes to credit scores, diversity is key and credit scoring models like to see that you can maintain and manage a number of different types of credit accounts.

Many people will think they don’t need a gasoline card or a department store card because Visa/Master Card/AMEX/Discover is accepted everywhere.  I keep that Sunoco Card mentioned in number 2 because it is also a different source of Credit.  Sears has been after me for years to transfer my Sears card into a Sears Master Card for “My Convenience”.  I insist on keeping it a Department Store Card only for the mixture on my Credit Report.

  1. Not Paying a Bill

Unpaid bills are not “unique” when it comes to what affects your credit score. But an amazing number of people treat certain bills differently without any basis for doing so. An unpaid bill is an unpaid bill, and if the biller can identify the legally responsible party, there’s an excellent chance the delinquency will end up in collections and on that person’s credit report. Here are a few examples of bills people ignore (but shouldn’t):

Any disputed bill after a decision has been made in the biller’s favor: A moral opposition to paying the bill does not relieve the consumer of responsibility to pay. Don’t skip payments unless the biller states that doing so during the dispute process won’t harm your position or your credit.

Parking tickets, unpaid toll charges: In most states, these are the responsibility of the vehicle owner unless he can prove someone else was driving.

Library fines, unpaid equipment rental charges, unpaid storage fees, lapsed gym membership: Any time you are under contract to pay, the unpaid bill could show up on your credit report and hurt your score.

Rent: Some landlords, particularly those of the corporate variety, report to the credit bureaus.

What may seem like unimportant bills are still bills and can affect your credit score.  A $20 parking ticket can cost you literally over $100,000 in added interest on a $500,000 mortgage.

Gary McAdams, P.A.

The Key West Life

Barbara Anderson Realty

305-731-0501

garymcadams@realtorgary.com

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