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The importance of credit scores to a renter or buyer.
We all know that credit scores are important and that the higher the better. However, what we fail to see at times is just how harsh the repercussions can be even for a slight downturn in score. This is especially true in the realm of homeownership as well as tenancy. That dream pad may be out of reach as mortgage lenders, and now landlords, use credit scores to evaluate likely candidates.
A low credit score can cost you.
Most of the time, we realize how important a favorable credit score is only when we find ourselves struggling to secure a loan, or when we are slapped with high interest rates, or even when we are denied employment. In the housing market, it can literally determine your fate.
For example, prospective homeowners (when buying a house) are evaluated and given an interest rate based on risk. The lower the score, the higher the risk for the bank and, subsequently, the higher the interest rate the unsuspecting homeowner will be charged (among other premiums). These charges may seem small, such as an increase from 6.5% to 6.9%, but you must keep in mind that these are based upon hundreds of thousands of dollars, not to mention the unyielding power of compounded interest.
Renters, on the other hand, may face landlords turning them down, higher rent amounts, and higher securities. Landlords always look for tenants who can pay on-time, every time. However, there exists a disconnect between the accurate recording of MORTGAGE payments and of recording RENT payments. Mortgage payments are almost with conviction recorded into your credit history. Apartment rental data is not part of the typical credit score (FICO, Experian, etc.). Therefore, if you are a religious rent payer but a less than perfect financial anything else, you may find yourself in a tough spot. To counter this, get a letter from a previous landlord that states you pay your rent on a regular basis to win over the heart of your prospective landlord.
Altogether, raising your credit score is like getting fit. It’s not easy to do; it takes time and commitment and there are no magic bullets or quick fixes. Slow and steady definitely wins the race
What is in a credit score?
As you read on, remember no single thing determines your credit score (hint: percentages are given) and for some purposes different aspects may hold more weight than others, depending on the application. The following is the general distribution most credit reports use. We know what is not in a credit score and how a low score can affect our chances of acquiring what we want. So, what is actually in a credit score? And how heavily do these weigh upon the final score?
Payment history – 35% of overall score
Payment history is your track record for repaying your outstanding debts. It is one of the most heavily weighing factors affecting your score. The primary thing any credit reviewer wishes to know is how well you pay back your obligations. The payment history is how creditors obtain that information, and what it contains will affect any eligibility for any purpose.
We can imagine what you are thinking, “Oh no, what if I have a few late payments?” Late payments (as in a few) aren’t automatically the death of your score, it’s the overall picture that gets you in (or left out). Having no late payments does not guarantee a near-perfect score either, your payment history is one piece of the cosmic credit score puzzle.
Your payment information is derived from:
Credit Cards
- Visa
- MasterCard
- American Express
- Discover
- Store Specific Credit Cards
Installment Loans
- Mortgage
- Car Payments
- Student Loans
Public Record and Collection Items
- Bankruptcies
- Foreclosures
- Suits
- Wage Attachments
- Liens
- Judgements
Details on Late or Missed Payments, (delinquencies), Public Record, and Collection Items
- How Much Owed on Debt
- 60-day Late Payment
- 90-day Late Payment
- How Many Accounts Show No Late Payments
Amount you owe – 30% of overall score
There is nothing wrong with owing money. It certainly does not produce you an unfavorable credit score. However, owing a considerable amount of money on many accounts may be a sign of an overexerted budget. It may hint that you may not be able to make all of your payments on time or at all. The task of assessing this aspect of your credit score is in determining when your credit profile maximum has been reached. This is done by evaluating;
- The amount owed on all accounts and on different types of accounts.
- Whether you show a balance on certain types of accounts. (credit cards vs. installment loans)
- How many accounts have balances.
- How much of the total credit line is being used on credit cards.
- How much of installment loan accounts are still owed.
As a general rule of thumb, you should keep an eye on the accounts with remaining balances and the proximity of those to reaching their maximum line of credit, and subsequently the amount of payment being sent consistently.
Length of credit history – 15% of overall score
How long and illustrious is your credit score? In part, your credit history is based on the length of time you have had credit. However, you may be surprised to find out even people who have not been using credit long may possess high scores again depending on the overall state of their credit report.
The length of credit history considers:
- How long your credit accounts have been established, the oldest account to the average age of them all.
- How long specific credit accounts have been established. (credit cards vs. installment loans)
- How long it has been since you used certain accounts.
New credit- 10% of overall score
Riding on the premise of amount owed and length of history, the natural next step is new credit. It measures the increases in amount you may now be liable for in one way or another. Again it is based on the concept of possible overextension, it isn’t bad or good necessarily, and it is simply based on your forecasted maximum.
New credit component of your score is based upon:
- New credit accounts
- New credit amount or maximum credit line
- Application for new credit (it isn't necessary to even receive the credit applied for)
- If turned down, may be considered that maximum risk has been reached
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