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Maintaining a good credit record is very important for a person’s accessibility to mortgages, car loans, and credit cards. The following are various areas that would impact a person’s credit record, and ultimately his/her credit scores:

Ratio of Credit Balance and Credit Line/Limit

The credit accounts listed on a credit report are usually referred to as “trades”. The types of trades include mortgage, installment, and revolving. A Mortgage trade, as the name suggests, represents a mortgage account. An Installment trade usually represents a car loan. A Revolving trade is usually for a credit card account.

The ratio of total current balance and total credit line/limit for a Mortgage or an Installment trade does not have much impact on a person’s credit score. A ratio of 40% or below for a Revolving trade would help one’s credit score (unfortunately we won’t know by how much as such algorithm is the top secret of a credit model). This does not mean that you should always keep your credit card balance at 40% or less of the total credit limit. If you’ve got a good credit card balance transfer offer, you may very well take it if you don’t need to have a good credit score at the time. You just need to make sure that you pay off the balance at least one month before you apply for a mortgage or need to pull your credit report. You may get quick a lift on your credit score (our past experience showed 20 to 100+ points improvement even though this is not a guarantee for future indication as scoring algorithms change all the time).

Late Payments

If you are late for a mortgage or loan payment for 30 days, your credit report will show 1x30. If late for a payment for 60 days, it will show 1x60, and so on. Normally if a mortgage has an 1x90 or 1x120, the lender will trigger the foreclosure process. Accordingly, a car loan would trigger the repossession process, and a credit card the collection process. Late payment would has sever impact on a person’s credit score. The Late Payment record will stay on the credit report for 7 years. From the impact to credit score perspective, late on mortgage payment is more sever than late on car loan, which in turn is more sever than late on credit card loan. From the late time perspective, the newer late payment has more impact than the older late payment. In other words, a late payment in April 2009 would impact the credit score more than a late payment in June 2005.

Collections

Collection is usually triggered when non-payment lasts more than 3 months. When it happens, a collection agency would usually send you a letter requesting you submitting evidence to show that the debt does not belong to you or you have paid the creditor. Otherwise the collection would be deemed valid. The impact of a Collection record would be significant on a person’s credit score. A recent Collection could cost a credit score to drop 30 or more. Some people might think there would be no impact if a collection item is eventually paid. Wrong! A paid collection is still a collection. Based on our past experience, if an unpaid collection costs 100 points, a paid collection may very well cost you 70 points or more. A Collection record will stay on one’s credit report for 7 years. The impact of a collection record on credit score would gradually reduce as time goes on. So in order to maintain a good credit score, one should respond promptly to any collection letters. Contact the collection agency and resolve the collection dispute ASAP! Normally if you can resolve the collection issue with the collection agency within 30 days of receipt of a collection letter, the Collection would not be reported to the credit bureaus therefore won’t be added to your credit report.

Public Records

This section includes judgment, tax lien, and bankruptcy history. Judgment is kept on credit report for 7 years. Bankruptcy record will be kept on one’s credit report for 10 year. Tax lien will be kept for 10 years while some federal tax lien may be kept on one’s credit report forever. If this section is blank, there will be no impact on one’s credit score. Any record in this section would have a negative impact on one’s credit score.

Credit Inquiry

Every time an inquiry is made by a lender to one’s credit report (a.k.a. “above-the-line” inquiry), it could be seen as a sign for a potential credit account. If too many inquiries are made within a short period of time, it would have a negative impact on the credit score. At Circle Square Mortgage, we had seen a case before where a person had more than a few dozen inquiries within a month, which cost more 100 points in her credit score.

If an inquiry is made by the person to whom the credit report belongs to (“below-the-line” inquiry), it would not have any impact on one’s credit score. A person should minimize the number of the “above-the-line” inquiries to only when necessary. However, the person can pull and/or request his/her own credit report as often as he/she wants. A person can get one free credit report annually from www.annualcreditreport.com.

Credit History

One’s credit history gets established normally with the first credit card approval. If a person has had a social security number for a while but never had a mortgage, car loan and credit card, there will be no credit history for the person. In general, the longer the credit history, the better it is for one’s credit score. Once the credit history exceeds 7 years, there would not be much difference with regard to the length of credit history. People with only one or two years of credit history can very well have a good credit score. In order to establish a credit history as soon as possible, one could get a credit card for students when in college, or apply a secured credit card through the bank he/she has a depository relationship with.

As mention prior, the highest credit score is 850. How could one achieve a full score or get closer to it? Empirically, if a person has long-enough credit history, no credit inquiry within last few years, no public record, a mortgage account with long-enough history, a car loan with long-enough history, one or two credit cards with high-enough credit limits and paid on time every month, it would become possible! In reality, it makes no difference for a lender if one’s credit score is 800+ or 750. A person doesn’t have to always pursue a very high credit score. You just need to keep it high-enough to be able to achieve your goal, being that obtain the best and lowest rate for a mortgage or a car loan.

Circle Square Mortgage can help you determine the most favorable mortgage program based on the analysis of your credit report and other pertinent information such as income and assets. Should you have any question regarding your mortgage eligibility, please feel free to contact us at 888-518-8818 or via email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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