Credit Score

What is a credit score?
Each time you go to get a loan apply for a credit card, get a mortgage or even rent a car or apply for a new job, your credit score will play a huge factor with your success.

But how far can your credit score go? And what factors play in when it comes to determining your score or the underwriter decision?

As a rule of thumb any credit score under 620 is considered poor and anything above 700 is good.

The credit score is determined by several factors including you history in utilizing credit, your income, your payment history and most importantly your debt to income ratio aka DTI.

I have seen people who have a perfect credit score in the 800s and they were turned down for a $10k loan!!!
You might ask how come? This is impossible!!

It is very important to understand how the credit score changes and how often is it reported and what is reported on it.

Just in the recent years you credit scores are now available to you to see and manage, before you could only see them once a year for FREE and each time after that you had to pay a fee to the bureau that you want your copy of your report from.

Today 3 major agencies manage the credit in the United States; Transunion, Experian and Equifax.

These 3 agencies receive reports from institutions you do financial business with every 14 days and they publish this information to your report through an algorithm which then generates and updates your credit score.

The information collected is about any loans you have or money you borrowed, any credit cards, mortgage, car loans etc…

The details about this information is as follows, how long these accounts have been open, how much is it? The terms and if you are in good standings! They also report whether the accounts are open or closed. Even if an account was closed it will remain on your report for the next seven year and will impact your credit score.

P.S. even tho after Seven years some information might still show on your report but they are not to be considered by the calculation of your report, however an underwriter might look at them and might question them.

The length of your open accounts is very important it shows you have experience managing your finances.

The payment history shows whether or not you are responsible in paying on time.

The number of accounts and the diversity and types of these account open can also determine your reputation among institutions and how versatile you are in managing your finances.

The amount of the open lines and loans and how much you have used is very important to determine if you are a spender or a keeper, and whether you are at risk to get further in debt or you are capable to manage your finances and be in debt to a minimum.

The amount of your total debt compared to your income is probably the most important factor in your credit score and the underwriter decision.

If let’s say you make $2000 a month in income and you have a car payment of $300, $700 in rent, $150  for master card, $170 for a Macy’s Credit card and $90 for a small personal loan you have borrowed.

This will bring the total of your payments to $1410.

To calculate your DTI you divide the total of the monthly bills by your gross income which is your income before taxes. (Total bills are only liabilities such as loans and payments including rent and/or mortgages and other debt- expenses such as gas, groceries, phone bills, car insurance, utilities etc. do not count in the calculation).

The result is your Debt To Income Ratio known as DTI.

Here’s an example: 300+700+150+170+90=1410 this is the total of payments using the example above. We divide that by the gross income which is $2000

1410/2000=0.70 which translates to 70%

In this case the DTI is 70% which means that 70% is the monthly income in this example goes to payments which is very high, considering that we didn’t take into consideration groceries, gas, entertainment and other expenses.

If you are wondering the magic number is 30% keep your monthly payments at 30% or below don’t get in debt and only buy what you need or you have another solution make more money to raise your monthly gross income which in return will drop your DTI.

So let’s say you get a raise or pick up another job and you start making another $2000 a month based on the same formula now we will divide your monthly payment on the new total income of $4000 the result will be 1410/4000=0.35 which is 35%.

As you can see this really made a huge difference in the DTI and definitely will have a huge positive impact on your credit score.

So in a nutshell, the credit score alone is not enough you need to consider the full image and all the factors and work on them, it is not hard but it takes building some healthy habits and understanding what impact your financial decisions will have on your score.

I will give this advice reach out to your local bank and meet with a banker, they are the best to give you the best advice on how to budget and manage your finances, they have a lot of tools and resources to help you plus they do it for free at no additional cost and they love taking about it.

Here tou have it get hold of your banker and set up an appointment to discuss your financial needs and goals and let them help you out.