Boys: My husband and I have been very irresponsible in the past and now think we would like to purchase our first home. The time seems right and prices are still good. But, as you can probably already figure out, we don’t qualify to purchase a home due to our poor credit rating. While we have not been to a lender to check our credit score, we thought we’d begin with having you Boys give us your guiding-light-map to what we should do first. My parents think you guys are a hoot, but your advice is sound.
— Fred & Inda Redd
Fred and Inda Redd: Sort of goes with this week’s topic, how to fix your credit so you can go deeper into debt. But at least this debt is good debt. You have to live somewhere and owning is much better than renting, even if it puts you in da’ red. Take it from here, Lar.
Well, credit is like one of the most important things we have. Credit seems to follow us wherever we go and whatever we do, whether it’s buying a house, a car or furniture at Wood’s. Everyone wants credit but every business wants a credit report to give you credit. Credit is a doubled edged sword. To get credit you need to have credit already established. How do you get credit? Well, try the Turlock Irrigation District, PG&E or even your cable TV company. All those are established credit accounts. Even your cellphone is credit. The question is how do you keep your credit? I know people who think just because they pay the bill their credit should be good. To keep your credit in good standing you need to pay your bills in full (full payment) and on time. On time is not on your time, but by the due date that is on the statement. One late payment in the last year, or two, can wipe out great credit. Credit is a promise to pay a debt when it is due, not after it’s due. Lloyd.
Some great points in that paragraph Lar. I’m going to write about your credit score and how to get a better score. First off, to buy a new home you’ll have to have a FICO credit score of at least 620. With a 620 score you may have to do some letter writing to explain some credit issues, but most lenders will loan on a 620 or better. Ideal FICO scores are above 720. The max a FICO can be, I’m told, is 850. Honestly, I’ve never seen anything much higher than 803. There is some argument as to how to repair your credit and the following is my understanding, not financial expert advice. Start with the basics: pay off all your small debt. Get the Nordstrom’s bill paid off. If your Master Card is low, pay it off. If you have old debt that is hounding you, pay it off. Don’t go out and get a number of new charge cards. This will hurt your score. Another hint, don’t close unused cards, this can also hurt your score. Your FICO score is based on your payment history, your utilization of your credit or your debt to income ratio of the current amount owed. Then there is how long you have had the credit and, again, how you have paid. The score also takes into account the type of credit you have such as revolving (Harrod’s) or your car payment; then your installment (Wood’s Furniture) and consumer debt such as T.I.D. or your Carr’s Cleaner’s bill and how you have managed these accounts over the years. Lastly, the score will be based on how many credit inquires you’ve had recently. Your new lender doesn’t want to see five inquiries for credit when they are thinking of giving you credit. Your turn to wow us with knowledge Lar.
A few years ago your FICO score was based simply on the amount you owed to the amount you had in credit. You could have a $5,000 balance on one card but have an extra charge card with a $30,000 limit and you might look good to the lender. So, to make your credit look better without really doing anything the company that was helping you get a better score would simply get you a charge card with a very high limit and told you not to use it. One simple act improved your score without doing a thing other than getting you more credit. This is now not legal to do, thankfully.
Fred and Inda, Larry and I suggest you get to a local lender or your banker and have your credit pulled so you can begin the task of rebuilding your life so you can buy that home. Until you have your credit run, you will not know where to start the rebuilding process. Who knows, it might not be as bad as you think.
Credit is like insurance, it measures your risk to the lender. The more the risk the lower your chance of borrowing in today’s world. Credit is a not a right. You have to deserve it and continually work at keeping it in top shape. A good FICO is not based on how much your salary is or how much money you might have. It is based on how well you pay what you have promised to pay and when. So, Fred and Inda, above is your map to a super FICO score. The world is waiting on you to jump in and become a good risk. Good luck and please let us know when your names change from Fred and Inda Red to Fred and Inda Black.
— A little about us, Lloyd is a retired farmer of 27 years and a realtor for about 10 years. Lloyd is an active member of the Central Valley Association of Realtors and sits on the CVAR Board of Directors. Lloyd is a long time member of CVAR’s Master Club for his sales production.
Larry has been involved in Turlock real estate for 30 years and has been a broker for almost 27 years. He is also active in CVAR activities and is a past president of CVAR. If you have questions please call Lloyd at 531-4853 or Larry at 484-4216. E-mail questions for future columns to: email@example.com or firstname.lastname@example.org.