By Stephen Fennell
The topic of credit comes up 100% of the time when considering whether to buy or refinance a home. The reality is that credit is an essential, vital, and necessary first step for all who dare enter the mortgage world. As important as it is to wealth building, it often surprises me how little most know about credit, so in this article, we’ll be exploring some myths, facts, and tips to better understand and prepare yourself.
There’s a clear lack of formal education on credit, and it’s perpetuating many myths about credit and reporting. There’s truly no formal knowledge base, foundation, or educational class one can take to get the FACTS about credit at a young age. Our schools just don’t focus on teaching our kids about credit before graduation, so is it any wonder that they enter the world with no true knowledge or understanding of it? I always tell people that if I had a class in Junior high about credit it might not have taken 20 years to get an over-700 credit score.
In fact, many people have NO credit score because they’ve never been told how to build one or the importance of it in today’s world. Put simply, you must take on debt to start building credit. Despite this being the case, many people have no idea, which leads us to our first myth: If I pay my bills and accumulate no debt, I should have great credit. Wrong! The truth is that credit scores are based on the following factors: type of credit (10%), length of credit history (15%), new credit (10%), amount owed (30%), and payment history (35%).
Here’s another common myth we hear when people are shopping for a mortgage: If I have my credit pulled multiple times, it will hurt my scores. First, the score that counts for banks and lenders are FICO scores, and they have 40-60 different versions, most of which consumers don’t have access to see since they’re used to assess mortgage risk. While there are some places you can pay to access those versions, most consumers use their credit card sites or free credit reporting sites to access their scores. Some of these sites utilize a vantage scoring model instead of FICO scoring, often leading to confusion on the part of consumers. While vantage scores are good for directional indicators and beginning to understand credit, they’re not the source banks rely on for assessing risk.
Additionally, consumers are allowed up to 45 days to shop for a mortgage and have their credit pulls be considered one lump-sum hit (hard pull) on their report. This protection only applies to mortgage checks, so anyone shopping for a car, jewelry, or even lawn equipment at Lowe’s should probably wait until they’re in their home to buy. Aside from that, the government protects your mortgage shopping and you don’t have to worry about hurting your credit every time.
Regardless of whether you need credit scores or simply want to improve existing ones, there are options for doing so both in the short-term and in the long-term. If you don’t have credit cards, I’d suggest getting one in the form of a secured card and not exceeding 30% of your monthly limit. The key is to get a revolving line of credit so you can start getting potential good credit reporting monthly from a credit vendor. Remember, 35% of your score is dictated by your payment history. Most secured cards report monthly to the credit bureaus, so you have an opportunity to earn positive reporting every month as long as you pay the card on time. Let the bill come before you pay it off, however, since a bill not being generated equates to zero reporting to creditors occurring. It’s the actual reporting of balances being settled which generates those positive scores.
Knowledge is power, so I hope this breakdown of credit helps provide some additional knowledge to get you ready for the home buying process. Buying a home is a huge step in life, and credit is something many go their entire lives without trying to understand, so you’re already ahead of many by finishing this article! Have questions still? We’re here to help and only a phone call away.
Stephen Fennell is a Sr. Loan officer for Fountain Mortgage. He has been in the mortgage business since 2015, helping families improve their credit and buy homes all over the country. He has been an Adjunct professor for Baker University for 15+ years and develops content designed to inform and educate inside and outside the classrooms.
This weekly Sponsored Column is written by Steven Fennell of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain Mortgage today.
Steven Fennell NMLS ID:1387618; Fountain Mortgage NMLS: 1138268