Welcome back, Grasshoppa! I, Jeremy, have awaited your return. If you missed it, last time we covered some credit score basics and provided a path to getting a free copy of your credit report.
If you are now or will ever be a mortgage shopper, the following will serve you well. I have seen many a mortgage application die at the hands of the cunning FICO, so let us not delay.
[POOF! I disappear from my seated lotus position in a bluish cloud of smoke and reappear beside a living, breathing credit report. “Gah!” you gasp.]
Be not afraid, Grasshoppa! By learning the furious five parts of its anatomy we can uncover corresponding attacks. The percentage shown is the weight each part carries in your total score.
Part 1 - Payment History (35%).
Late payments hurt. A lot. For seven years. (!) Lenders will check your credit before approval and sometimes again before closing. If you have missed any payments during that time, FICO could deal a fatal wound to your mortgage application and slay your homeownership dreams on the spot.
- Myth 1 (thanks to a helpful comment by MrMcLargeHuge): “An unblemished credit report is suspicious. Lenders want to see some kind of mistake in your credit history.”
- Combat tactic: Noble lenders look for healthy borrowers while predators look for weaknesses. Colorful ad slogans like “Bad credit? No problem!” should warn you like the bright bands of the deadly coral snake.
- Myth 2: “Never pay off your balance completely.”
- Combat tactic: Know which credit lines you have open (by seeing your report) and make sure to keep them paid. If you can only pay the minimum, do it. DO pay your balance off each month; however, DO NOT necessarily close the account. We’ll cover that later.
Part 2 - How Much You Owe (30%).
If you have a car loan, student loans, and three credit cards maxed out, this indicates a risk that you will be unable to repay your obligations should something unexpected happen (illness, loss of job, an “amazing” shoe sale, etc). Even if you are keeping up on your payments, FICO will ding you for maxing out.
Also, if you have more credit lines available than you could ever hope to repay, it negatively affects your score.
- Myth 1: “As long as you pay them off every month, you can max out your credit cards.”
- Combat tactic: Keep your balances at or below 25% (some even say 10%). For example, if you have a $1,000 credit limit, only spend $250 before it’s paid off.
- Myth 2: “If I have a lot of credit available to me, it shows lenders I can handle the responsibility.”
- Combat tactic: If you earn $4,000/month, it will make FICO nervous if you can dive into $20,000 of credit card debt at 22% interest rate in a moment’s notice. Limit your credit cards to three.
Which three? Ahhh, you show wisdom for one so good looking, Grasshoppa. Don’t go creating credit card confetti with your katana just yet. Next time we meet, we will explore the three remaining parts of credit score anatomy and bring the whole creature into view.
*You have, no doubt, heard many myths and developed your own tactics. I cordially invite your questions and comments. When you do, we all get stronger.