Although our Dollar bills bring the phrase “In God we trust”, it is fair to say that our financial system is actually based on trusting of another thing: credit. Yes, credit is the creed for most of our currency exchanges. And the credit score is a method of asserting your position on this trust/do-not-trust scale.
On this article, we will try to explain exactly what is a credit score and how does it impact Real Estate and your everyday life.
But first, do you fully understand what is a credit score? How it's established, why it's established?
Like we were saying, the credit score is a way financial institutions developed to protect our economic system. In the end, it’s nothing more than data management: consumer credit reporting companies collect and aggregate some of our information to assert our financial responsibility. Do we pay our bills in full and in time? Do we spend more than we should? With that information, they produce a Credit Report that can be requested by creditors, government authorities, landlords, employers and others who need to know if we are financially responsible.
This is the key to a credit score: responsibility. You can have a lot of money in your bank account and a lousy credit score, and be almost broke but in good standings credit wise. The credit system was developed so capitalism could hold back people that spend more than they can afford – thus destabilizing the ones he/she is in debt with – and nurture/motivate people who only put its mouth where its money is to keep spinning the wheel.
Now that you know the general whys and hows, let’s dig deeper into some aspects of the credit score range and its use on real estate.
A credit score range from 300 to 649 is considered bad. If you’re within this range, don’t worry. We’ll get to how to improve your credit score in a bit.
A credit score range from 650 to 700 is considered fair. But you want to know what is a good credit score, right? Well, that would be something between 700 to 749. Seems a bit crazy that the “bad” credit score range spans 300 points and the good only 49, right? We think so too. But this is something no one but the consumer credit reporting companies can explain why when determining what is a good credit score…
From 749 upward is considered excellent.
What impact does that have in your real life? For almost everything that requires someone trusting your ability of payment, a credit report will be required for the other party to establish their conditions. So, when turning on electricity on your new home, with a good credit score range maybe the power company will exempt you from paying a security deposit like the one people with bad credit score have to pay in order to have the lights turned on. A person with a bad credit score range will hardly classify for a mortgage loan to buy a house. And outside real estate, if your credit is good you’ll usually get lower interest conditions when paying for several services like phone carrier, internet and or Television providers.
We’ve never heard of a highest credit score than 850. And it doesn’t really matter when you think about what is a credit score made for. You only need to be within a range; the interest condition a person with an 850 credit score gets on a real estate mortgage loan (or anything, really) is the same one person with 800 gets.
If you are worried about your standings, relax. The blessing (and the curse!) of this system is that it is non-stop; it’s always changing. Credit reports track your 7-to-10 year history of financial records but every single positive thing can improve your situation.
It’s said that 15% of the weight of a credit score is the length of your credit history. What does that mean? Independently of how well you’ve been playing, if you’ve been in the game for a long time, you will get good points in this category. If you just entered the court, you won’t receive too many balls.
And that is why you need to make points when you do receive the ball: 35% of your credit score is connected with your payment history. This is the heaviest of the categories. If you’ve been paying everything in full and in time, you’re scoring. If you’ve been constantly late, you’re losing. 10% is for every new credit you receive – if you get approved for a student loan, it counts. If you apply and get approved for a new credit card, it counts. Diversity matters: the more different the types of credit you get approved, the better, as your credit mix counts for 10% of your score. And the last 30%, of course, goes to that thing anyone must know it’s important: amounts owed. You will, obviously, get penalized if you owe money to any institution as the system was designed exactly to prevent this.
Ok; with that in mind, good things to positively improve your standings:
Diversify! Don’t apply for thousands of credit cards, as it might seem that you’re trying to save your financial situation via new cards. If you get rejected, go to the bench and rest for a while. But also try doing a lease. A car is ideal, but if it’s too much for you, do a phone lease! How about a student loan?
Don’t get too near the limit of your card. It’s all about responsibility, remember? Doing this you will preserve the biggest factor of this equation: payment history. If your limit is 100 a month, try using only 60 dollars of it. And pay it on time, of course.
Don’t be late on your payments. Obviously a big no-no. From all we’ve written so far, you understand why, right? It’s all about showing you are responsible!
Don’t cancel a card that still has a balance. Especially if you have them for a long time! Make sure you paid everything before you cancel it. And, actually, think about it if you really need to cancel, because the hassle of doing it alone, should be a factor in your decision.
Don’t let your house go into foreclosure. If the fact of your house going to Foreclosure wasn’t bad enough as it is, it will hurt your credit score range. Badly.
Speaking of Real Estate… Here are several ways your credit score range will come into play in Real Estate.
If you’re renting an apartment, the credit report will be a great tie breaker for the Landlord when deciding between the prospective Tenants. Whoever has the highest credit score will probably get the apartment! It's completely within the Landlord-Tenant's right to do so.
If you’re a real estate investor, you need loans, and you need them fast. A good credit score will accelerate the process for the lender. Seeing your history of good payments, it proves less risky for them, they don’t need to go through a lot of in-house processes. And not only that; the highest credit score you have, the more you’ll be able to negotiate better terms on your real estate loans with lower interest rates, as the lender is also concerned with its own standings.
If you’re buying a house, also important. Credit score will determine if you can make an offer in the first place, as the mortgage will only be considered by the lender If your history shows you are responsible enough to pay for it.
We hope you understood what is a credit score and how does it impact Real Estate, especially if you’re a homebuyer. Moreover, we hope you take it into consideration how important it is to take care of your finances in order to achieve the highest credit score you can.
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