What is Credit? Simply put, credit generally refers to the creditworthiness of your credit history. Your ability to borrow money and promise to pay it back later. Usually with an interest rate attached. Your score is the result or value of your creditworthiness.
Who determines the scores? There are 3 major credit bureaus; TransUnion, Equifax and Experian. Your scores may differ between them because not all lenders or agencies report to all three.
Why is your Credit Score Important? For so many reasons, but for the purposes of buying a home, your credit score is part of your financial health. Good credit scores offer you many advantages including savings, benefits and access to loans with favorable rates. Good credit scores demonstrate that you have a history of paying your debt on time so you have access to more desirable loans and lower rates. Lower rates equal more buying power or lower monthly payments.
How do you get good credit? Many things can impact your credit score: prompt payment, keeping your balances at 50% below the credit limit, and minimizing any inquiries on your credit report.
What determines Good Credit? While this will vary from lender to lender, for most loan types a minimum of 620 is needed to buy a home but higher is definitely better. Often a credit score above 740 will get you the most desirable rates. With that said, it is possible to obtain a home loan with a credit score lower than 620 to obtain great rates.
What if you don’t have good credit? That’s ok, we have all been there. Luckily for you there are many ways to get your credit back in tip top shape. Set your goals and expectations. Depending on your situation, cleaning up your credit can take some time. So, be patient. It will be well worth it in the end.
Credit Clean Up
Ways to Clean Up Credit
- Pay off Debt
- Pay down debt (ideally keep credit cards / loans at less than 50% spent)
- Pay off or make payment arrangements with collection agencies
- Dispute accounts that are not yours. You can do this directly through Experian, TransUnion and Equifax. I recommend all three as all three bureaus determine your credit scores
There are many reputable *debt consolidation and *debt settlement companies out there and there are many fraudulent ones. Do your research. If you are someone who can benefit from a structured debt plan and don’t mind paying a few bucks for it, this could be a viable option to ensure that each month you are chipping away at your debt and cleaning up your credit. If you are someone who thrives on self-discipline then attacking it on your own could be rewarding.
*Debt Settlement: Companies that charge you to negotiate your debt.
*Debt Consolidation: Companies that will combine all of your debt into one loan and one payment. This often sounds like a good idea but can stretch out your payments resulting in staying in debt longer.
There are two popular strategies to paying off debt: The Debt Snowball Method (developed by Dave Ramsey) and the Debt Avalanche Method.
The Debt Snowball Method in a nutshell focuses on paying off loans in order of smallest to largest. Making minimum payments on all loans, but putting excess funds towards the smallest loan until paid off and then applying that minimum payment and excess funds to the next loan until paid off and so on. The object is to pay the loans down as quickly as you can. Pro: This psychologically keeps you motivated each time a debt is paid. Paying the smallest ones first gives you more immediate gratification. Con: this method doesn’t take into consideration the interest rates so you can end up paying more interest over the course of this plan.
In comparison the Debt Avalanche Method focuses on paying off your highest-interest loans first as quickly as possible. Similar to the snowball method, you make minimum monthly payments on all debts but apply any excess funds to the highest interest-bearing loan first vs the smallest balance loan. Pro: the most efficient and cost-effective way to pay off debt. Con: It could take a bit longer to start seeing immediate results if your highest interest account is also your largest balance account. So keeping motivated will be key.
If you would like more information or have any questions about the information we provided, please feel free to give us a call. We are here to help. We also have a trusted network of business professionals that can help guide you through the process.
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