We all know that credit is a major factor in our lives as consumers. We know we need it to qualify for loans, and for some reason jobs and landlords care about this strange number, but how do credit scores work, and why do they matter?
How Credit Scores Work?
There are three major credit bureaus, Experion, Equifax and Transunion. Each one of these bureaus reports your credit monthly based on a combination of factors including outstanding debts, late payments, and credit history. These scores are taken to form a composite score for any individual for which credit history exists. This is a number between 300 and 850. Not having credit history can be viewed as bad or worse than having a low credit score.
One thing to make sure of is that you pay your credit card bill prior to when your bank or credit card company puts out (read as: “mails out”) your statement. On that date they also report the amount you owe for that month as past due to the credit bureaus. Make a note of when this statement is sent each month and make sure to pay the bill before hand. Doing so can easily raise your credit score quite a few points.
But Why Do Credit Scores Matter?
Credit scores help lenders to determine the level of lending risk any individual poses should the lender choose to loan that individual money. In order to overcome this risk the lender will need to make more off of someone with a low credit score than someone with a high credit score. Therefore, a lower credit score will result in you being charged a higher interest rate than if you had a higher credit score. Individuals with no credit history often cannot qualify for a loan or are placed into the highest interest rate category along with low credit score individuals.
So what does this mean for me?
If you are beginning your home search it is important to get in touch with a great local lender (we recommend a couple here) in order for them to determine your credit score and help you begin to repair any outstanding issues with your credit prior to finding a new home. In this way they can help you qualify for a higher amount at a lower interest rate in effect aiding you in getting the most house for the least amount of money. If you have any specific questions about credit scores feel free to reach out to us and we can put you in touch with a professional free of charge.