Your credit score and history is one of those magical things that sit out there in the inter-webs just waiting to be increased, decreased, or inquired upon. That magical little number can offer excellent rates on loans or prevent you from getting the home of your dreams. You may be altering your credit score without even knowing it with too many inquiries or a high debt to income ratio. If you’re planning on applying for a home loan or refinancing, it’s important to understand what can affect your credit score. Here are five sneaky things that can ruin that score.
#1. Incorrect information.
Errors and mistakes can occur and if your credit report has incorrect information about your financial history, it could ruin your credit score or at the very minimum, bring it down a few notches. If your report has an error it’s important to call the credit bureau that issued the report and file a claim. Correcting mistakes can be a difficult task but it is worth the effort.
#2. Too many inquiries.
If you’re shopping for a home loan, car loan, or even the best credit card, too many inquiries can decrease your credit score. Lenders will pull a hard inquiry that will show up on your credit report and if you request these inquiries over a period longer than two weeks, each pull will show up individually. For this reason, it’s important to have all lenders or creditors pull inquiries all at once or within a very short period of time (a week or so), so that your credit history shows you are applying for the same loan, rather than several different loans.
#3. Unpaid bills.
Obviously, if you don’t make a loan payment it will show up on your credit history, but even things such as utilities, medical bills or even a late library fee can show up as a negative flag on your credit history. Keep your bills paid and up-to-date.
#4. Too much credit usage.
If you use your credit card for everyday spending and pay off your balances in full each month, your credit score can still be suffering. If you max out your credit card, it can harm your score more than you might think. It’s important to know how much credit you have left. If you have $5000 credit line and you charge $4500 each month, it could have a negative impact on your credit, even if you pay it off each month (depending on what day the credit is pulled). The balance of limit versus spending is known as the “credit utilization ratio” and maintaining a high ratio can hurt your score. It’s important to keep balances low on your lines of credit. A great goal is to stay under 30% utilization – for instance, if your Limit is $5000, try to keep your spending under $1500 if you are getting your credit pulled and want the highest score.
#5. Not using credit at all.
Have a credit card that has nothing on it and you haven’t used it in several years? That will not be a positive impact on your credit history, but it may not be a negative one either. Don’t be scared of using credit because not using it could negatively impact your score. If there’s nothing to show on your credit history, you will be seen as more of a risk then if you use a little bit of credit from time to time.
If you’d like a copy of your credit history and you’re considering applying for a home loan or refinance, feel free to give me a call. By answering a few questions from my free consultation, we can find out your credit score, what can be done to improve it, if needed, what possible rates could be based on different credit scores, and how you could save money in the future with the right home loan or refinance option.