Credit scores are impossible to predict 100% of the time. The slightest change in your credit report can cause your credit scores to change dramatically either up or down. Even though it is impossible to exactly predict what your scores will be for any particular credit balance, credit history, or mix of credit accounts, you can be pretty sure of the direction your credit score will go for certain changes your credit report might reflect from your credit history and credit report.
If you are considering getting a mortgage to buy a home in the near future your credit scores are vitally important to whether you qualify or not, what interest rate you get, how much down payment you will have to have, what kind of fees and closing costs you will have to pay, and perhaps what price of a house you can buy. All too often in stories we hear from our mortgage company clients, escrows and sales contracts are cancelled due to last minute changes in credit scores that an underwriter finds.
To ensure that your credit scores remain high, avoid these mistakes with your credit and credit accounts.
Credit Limit Max Out
Although this may not seem like a big deal if you have been making your payments perfectly a maxed out credit card can hurt your credit scores. Why is this? Even with perfect credit history, a credit card with a balance on it at the credit limit suggests that the card user might have a problem managing their credit accounts.
Since the credit scoring system tries to predict the future credit performance a person with maxed out credit is closer to having a credit payment problem than someone with very low balances against their limits. If your scores are low with maxed out cards, get your credit balances on your credit cards to less than 50% of their respective limits and watch your scores go up.
Missing A Payment
Is this a no brainer? Of course missing payments on a credit account is not a good idea and it will hurt your credit score. What you don’t know is that one missed payment could drop your scores by as much as 100 points in a worst case scenario.
Just imagine what the message is to your creditors if your payment histories are perfect, but your cards are maxed out and all of a sudden you miss a payment. With this being the case your scores are going to drop like a box of rocks in a pool. Best advice is to make your payments on time, maybe even a little early to avoid any possibility of them being late, and get your balances under 50% of their limits.
Closing Credit Cards
This is perhaps one of the most misunderstood negative impacts on a consumer’s credit report out there. Why would closing a credit card account hurt anyone’s credit score? Well, there are several factors that can help explain this.
1. When you close an account you are actually reducing your available credit which can significantly impact your credit balance to credit limit ratio. One factor that goes into calculating your credit scores is this balance to limit ratio. When you close an account your available credit limit goes down which increases your balance to limit ratio.
2. A second factor in closing an account and hurting credit scores is if the account is an older account. Older open accounts are also better for your credit scores as they demonstrate your ability to hold a clean credit record over time.
Too Many Credit Inquiries In A Short Period Of Time
With the exception of applying for a mortgage with several mortgage companies and applying for an auto loan with a few companies, too many other types of credit inquiries like those you get for a new department store credit card can hurt your credit score up to 10%. It is okay to build your credit portfolio, but do it slowly over time. A good thumbrule if you are looking to get a mortgage do not apply for new credit within three months of making your mortgage application. This should give your credit scores a chance to rebound from an credit activity that you might have recently done.
Keeping these four common areas where many people get into trouble with their credit reports in the front of your mind as you prepare for a mortgage application can save you a ton of aggravation and time; the aggravation for having low scores and being turned down and time in waiting for your credit scores to rebound.
Article written by Guaranty Title Agency of Arizona. Guaranty Title Agency has been serving the needs of the Arizona real estate community for over 30 years. During those years, we’ve developed a strong culture of valuing each client who asks us to serve them. We work for you. We don’t ever forget that. We’ll listen to your suggestions, and do everything we can to exceed your expectations. We’re your Partner for Success.