Credit Score Tips!

Now more than ever a great credit score seems imperative in securing the best financing. That's right, I said great! I did not say good. Gone are the days where a 580 score would buy you a home, at least most of the time. You might get lucky and get approved for FHA on a manual review with a 580 score, but even with FHA, you will pay a higher rate now for that score.

Or you may even be able to go Rural Development with less than a 600. In fact, I just closed a Rural Development combined with MSHDA where my buyer had a 593 middle score! But this is the exception not the rule.

The November issue of Money magazine showed a pie graph chart putting different weights on the different parts of a credit score. They break the score down into 5 categories:

1. Your payment history- 35%
2. How much you owe- 30%
3. Length of credit- 15%
4. Your new credit- 10%
5. Your mix of loans- 10%

I have to laugh because I used to joke that you have to be 50+ to have an 800 credit score or be my co-worker who had an 800 in her late 20s, but her parents opened up a credit card in her name when she was 11!

But amazingly, in the past year, in light of the credit crunch, I've actually had over a handful of borrowers with 800+ mid scores, and they weren't all over 50!

I decided that while the experts give some pretty sound advice, for example,

1. Obviously pay your bills on time (I seriously saw a 366 score once because the borrower opened up 4 credit cards to "establish" credit but never paid a cent on one of them)
2. Keep your balances at 50% of your credit limit or lower
3. Have a long length of credit
4. Open new credit sparingly

my observations have been a little different. I work in a unique brokerage owned by a non-profit housing developer, ICCF (www.iccf.org), and we have several HUD and MSHDA approved housing counselors, and in my former years as a housing counselor, here is what I learned:

1. Keep your balances at 30% of your limit or less
2. The magic number of credit cards to have open is two

According to the Money article they say not to let an old card go dormant, to charge something every month and to pay it off in full as to avoid interest. However, I decided, by a non-scientific method to take a close look at all of my buyers who were under 30 who had 800+ scores to see what they did, and low and behold, not one of them had any balance on a credit card! They also only used the credit cards on rare occasion, not monthly! And they all had just one to two lines of any kind of credit whether it was an auto loan, student loan, or credit card!

I would say that for a person just starting to establish traditional credit, my observation has been that in order to get a decent score in two to six months, opening up a secured credit card or loan and using it monthly is key, but for those with already established credit, the highest credit scores go to those who barely use credit at all, but use it once in a while!

Now I'm not saying to completely avoid credit. Obviously there are good debts. My general rule of thumb is this: if it can help you build assets- like a mortgage or student loan, or you get some perk like bonus miles, freebies (as long as you aren't spending more to get these perks- see my blog Does going to cash really save 20%?!), then borrow away. And, unlike some of these "credit repair" scam companies who think you have to have an 800 score to get a loan, you don't! But you do need a 720 to get the best Conventional rate these days (or 740 for the best rate on a cash-out), and you need a 660 to get the best FHA rate. I've had many a friend who had high balances have their scores fall into the high 600s.

Please, share your observations too!