As I began working in real estate, my exposure to people with varying credit scores began to skyrocket. I saw plenty of bad scores from my days working in banking however, those people weren't trying to buy houses. This plunge into real estate has made me realize that many people do not understand the importance of credit and how their use of credit affects their everyday lives. This blog post will share some enlightenment on how credit scores are calculated and how they affect your ability to afford a home.
Credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. The important word in this definition is trust. Unlike money, credit isn't backed by anything. You see one dollar and you know there should be some gold that's locked up in a vault that supports that currency. Your credit score is a reflection of your actions. If you repay everything on time and in full, it will go higher. If you are late or unable to pay at all, it will go lower.
So how is your score calculated?
35% payment history
30% amounts owed
15% length of credit history
10% new credit
10% credit mix
People with a perfect 850 credit score have never had a late payment. They use about 5% of their credit limit and have a diverse mix of loans and card accounts on their credit report. Having bad credit automatically makes borrowing more expensive and that higher interest rate may just make your mortgage loan unaffordable. This can cause buyers to look at houses that are possibly smaller, older, less updated and in neighborhoods that aren't the best.
It's imperative to use credit responsibly. This means not spending more than you can afford. Following these guidelines will also allow you to pay your bill in full every month. This saves you from paying interest, while at the same time establishing on time and consistent payment history. In addition to spending responsibly, be sure you don't spend more than 30% of your limit; it will negatively impact you by lowering your credit score.
Understanding credit and learning how to maneuver within the world of credit is paramount. Improper use may just be the deciding factor between being forced to live in the rental market or obtaining the American Dream and becoming a homeowner. After reading this post, I hope for everyone's sake it's the latter.