Managing Credit

The four most important factors regarding credit are:
1. Pay all of your bills on time. Know what bills report to the credit bureaus and which ones don't. This will help to maintain a better credit rating. Do not let accounts go to collection.
2. Limit your balances on all revolving credit (such as home equity lines and credit cards) to approx. 20-39% of your credit limit. (If you have 2 credit cards with balances of $250 each and a limit on both of $1,000, this is ideal). Do not max. out your credit cards and it is better to have small balances on 3 cards than to have 1 large balance on 1 card.
3. 2-4 credit cards is the ideal number of open credit cards to have. Make sure that you do not close credit card accounts when you pay them off. Your length of credit history and how long you have had open accounts is a big factor in credit scoring. If you have a ton of credit cards, close the newer ones and leave the ones that have been open for a long open.
4. Credit inquiries - I know there is a myth that you should only let 1 company pull your credit when you are looking to buy something because every pull lowers your credit score. This is right and wrong. Watch how many people are pulling your credit because you don't want to have numerous credit inquiries each and every month. However, when you are shopping for a mortgage, or anything for that matter, make sure you do all of your shopping around within a 14 day time frame because all mortgage related credit inquiries within this time frame will only affect your credit as though only one company checked your credit.

If your credit score is preventing you from qualifying for the mortgage program you desire, talk to one of our representatives about the variety of credit improvement strategies which can help you improve those scores and get into the refinance or purchase loan you need.

If you have a credit card that is maxed out you can request a credit line increase to bring your balance to limit ratio back within the preferred 50% range. This simple process can have a great affect on your credit score within a month's time. However with an increased credit line you do have to exercise fiscal responsibility to avoid getting deeper into debt.

It is important to establish several different credit accounts. Just having credit cards that have paid on time isn't enough. Lenders like to see diversity and longevity. Often homeowners will open jewelry accounts and take out small bank loans to increase there credit standing. Of course this has to be done prior to attempting a refinance.

Learning the art of managing your use of credit can pay big dividends when it's time to get a home mortgage. The difference between a good credit score (680 and up) and a fair one (630 to 600) could be huge in terms of the interest rate that you will pay and also the other terms of the loan.

If you have an old collection account on your credit report paying it off may actually hurt your credit score. Most lenders will ignore collection accounts over two years old. By paying off that account, the date of last activity becomes recent and it may actually reduce your credit score.

Credit is just one aspect of a person's overall financial picture. The best first step to managing credit responsibly is to manage all your money responsibly. This means creating and sticking to a budget, paying your bills on time, and not taking on more debt than you can handle.

It’s very simple to create a budget for your family. The only hard part to it, is sticking to it.
Budget categories should include food, housing, transportation, clothing, savings, health and contributions and gifts. Any other items the family spends money on regularly also should be included. Then, estimate how much money is spent on each category each month. The total should equal the amount of the family's income. If it is more, adjust the spending estimates to equal the income.

During the first month of your budget, keep tabs on how much you actually spend for each category. Try to stay within the estimated amounts, but if more is needed for one area and less for another, adjust the categories. If more money is spent in every area, adjustments may be required for a while to stay within the budget.

Before making any purchase outside the budget, consider what to give up from the budget. "Is it worth the sacrifice? Can you afford it? After all, once you spend a dollar, it is gone and cannot be used for something you really need.

Do not apply for frivilous department store accounts just because of an advertised discount. These accounts often come with marginal credit limits and high interest rates. Having even a small balance on a low credit limit card can hurt your credit score. Any time a department store requests your social security number they are bonding themselves to you and will report to your credit bureaus for many years to come.

» DISCLAIMER: The information contained in this article on 'Managing Credit' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.