One Mistake Could Drop Your Credit Score 100 Points
One of the most important factors during the mortgage process is having a high credit score. The reason why is because it plays a huge role in getting a low interest rate, in addition to lower fees on your home loan. After all, that is what most borrowers want, a low interest rate and low fees.
Ever since Dodd-Frank came into law, they implemented a new qualifying rule which is the borrower’s “ability to repay” debt. Naturally, you have an improved ability to repay with a very good credit score and sufficient income. A high credit score over 700 tells the lender that you pay your debts as promised are a low risk borrower. This means you are not likely to default on the mortgage.
Want to know how your credit score is calculated? Wouldn’t we all. The three credit bureaus lender’s use are different versions of FICO scoring system. For example, Equifax will use FICO Classic v5, Transunion uses FICO classic 04, the Experian uses FICO version 2.
In general, your credit score is based on five different factors from the three credit bureaus; Experian, Equifax, and Transunion. These factors include:
1. Payment History – Are you paying your bills on time, have you been over 30 days late?
2. Length of Credit – The number of years your accounts have been open and frequency of using them?
3. Amount of Debt – The number of credit accounts you have, and the balance outstanding for each one?
4. New Credit – Have you opened any new accounts recently?
5. Type of Credit – Typical debts include revolving credit such as credit cards, student loans, installment loans such as cars, trucks, furniture, jewelry, and more.
So, what are the drawbacks to closing a credit card?
If you close a credit card account you’ve had open for a long time, you eliminate the good payment history you had to show lenders of an active account with hopefully an excellent payment history. Nowadays, lenders want you to have 2-3 active credit accounts with a 24-month history.
Some lenders will even allow and review an account that was closed recently as long as it had a one-year payment history. However, your best bet is to keep credit card accounts open that have a long payment history and are used often.
If you only use in emergency situation, so be it but don’t close it altogether. Keep in mind, that a good credit score can have significant advantages for you in getting a mortgage. It’s crucial to use your credit intelligently and responsibly, because ultimately, the higher your credit score is, the more you can potentially save in the years ahead.
