It can be difficult to navigate best practices when it comes to building or maintaining good credit. This week, John Kunkel with Motto Mortgage has some hints, tips and smart advice for best practices.
Q: What does it take to start with a good interest rate?
A: A good interest rate starts with a good FICO credit score. This could be an issue for some because they don’t have a score. Often, having no score is a more significant challenge than not having a credit score when getting a loan.
Let’s remind everyone what makes up a FICO credit score. 35% of your score is comprised of payment history, the most significant factor. It evaluates your track record of timely payments on your credit accounts, including loans, credit cards, and other debts. Late payments, defaults, or bankruptcies can negatively impact your score.
Another 30% is made up by the total amount of debt one has. This factor considers the amount one owes on different credit accounts and their credit utilization ratio. It examines their balances in relation to their credit limits. As a rule of thumb, try to keep credit usage at 30% or lower on each credit card.
The length of one’s credit history accounts for 15% of their credit score. This factor considers the age of your credit accounts. A more extended credit history generally works in your favor as it provides more data for evaluating your creditworthiness.
The credit mix accounts for 10% of your credit score. This assesses the variety of credit accounts you have, such as credit cards, mortgages, personal loans, auto loans, and student loans. Having a diverse mix of credit accounts can demonstrate one’s ability to manage different types of credit responsibly.
Lastly, New Credit accounts for 10% of one’s credit score. It is ok to open new credit accounts; do it thoughtfully and ensure one doesn’t overextend themselves. Applying for new credit can result in hard inquiries, slightly lowering your lower scores.
Q: It is a complex process in how credit scores are determined. What if one doesn’t have a credit score. What are some of their options?
A: Having no FICO score means one has limited or no credit history. Building credit from the ground up requires effort, but it is certainly possible. Here are some steps one can take to establish a FICO score.
Open a secured credit card: A secure card is designed for individuals with limited or no credit history. One provides a security deposit as their credit limit with a secured card. This can often be a savings account or CD. Use the card responsibly, make timely payments, and keep your balances low to build a positive credit history. If you default on your payment the bank will cash in your collateral and pay off the debt. If this happens, it will still negatively impact one’s credit score because they were late with payments. It just won’t go to collections.
One can apply for a retail or gas credit card: Retailers or gas stations often have more lenient approval criteria for their cards. These cards usually have lower credit limits, but using them responsibly and making timely payments can contribute to building your credit history. Use it to purchase gas for your vehicle and pay the balance each month, or as I mentioned earlier, keep the usage below 30%.
My recommended way to build credit and one of the fastest ways to obtain a credit score, is to become an authorized user on an established credit account. If one has a family member or a close friend with a good credit history, one can ask them to be added as an authorized user on one of their credit cards.
Their positive payment history and responsible credit usage can help one build credit, often within 30 days. Ensure that the credit card issuer reports authorized user activity to the credit bureaus for it to be effective.
One should always do their best to pay bills on time. Although certain bills, such as rent and utilities, may not typically be reported to credit bureaus, late payments can be reported if they end up in collections. Consistently paying bills on time helps develop a habit of responsible financial behavior.
One should monitor their credit monthly. Monitoring one’s credit by regularly checking credit reports from the major credit bureaus (Equifax, Experian, and TransUnion) will help alleviate potential long-term credit damage. This allows one to identify any errors or discrepancies that must be addressed.
Everyone can pull their credit for free once per year from annualcreditreport.com. While this will not provide FICO scores, it will show all payment history, accounts, and any negative activity, unauthorized activity, and inquiries. If one uses an app to monitor their credit, know this credit score is directional and will likely not match the lender’s pull.
I also want to remind everyone that student loans are coming off the pandemic deferment. In many cases, the student loan servicer one worked with prior to the pandemic may have sold their loans to a new servicer. One must contact your student loan servicer to make payment arrangements. Typically, student loan payments are based on 1% of the balance; however, for many, that is not attainable based on income. A great option is called “Pay as you earn.” This option bases the payment on actual income, making it much more maintainable. One thing to keep in mind, even bankruptcy will not forgive student loan debt. On-time payments and not letting student loans default should be a priority for anyone with student loans.
This has been your weekly Motto Moment with John Kunkel. If you have questions or if I can help unlock the home of your dreams, give me a call at 479-621-3500. I’m John Kunkel, your Motto Mortgage Loan Officer. Unlocking homeownership dreams one key at a time.
Motto Mortgage offices are independently owned, operated, and licensed. An equal housing opportunity. John Kunkel NMLS 1-4-1-6-0-7-8, Motto Mortgage United Group 2-0-7-8-9-1-5, Motto Mortgage Velocity 2-2-8-8-2-5-6, and Motto Mortgage Heritage 1-7-2-0-4-3-8.
Lauren is a an award-winning journalist who decided after 10 years of newspaper experience to venture out. Hallmark Times was born.
