Credit cards, their payment history, balances, and credit limits are all part of a major factor that goes into determining your credit score.  We all know that your credit scores have everything to do with getting a mortgage and the type of terms you will qualify for.

One of the biggest factors in determining your credit scores is the total credit card balances over the total available limits.

Example:

You have 3 credit cards:

Card 1 has a balance of $500 and a limit of $2000

Card 2 has a balance of $500 and a limit of $2000

Card 3 has a balance of $500 and a limit of $2000

The total in balances of all cards is $1500 and the total available in limits of all cards is $6000.  Divide the total in balances over the total in limits.  In this example, it will give you 0.25 or 25%.  You always want to keep this percentage below 30%, because once it gets higher, it will start to affect your scores negatively.

Take this same example and say you wanted to cancel a credit card, because you didn’t want the temptation to use it anymore.  Well, if you took card 3, transferred the $500 balance to card 2 and cancelled the card, you would have a new percentage.  You still have a combine balance total of $1500, but now only 2 cards are open and a total limit of $4000.  1500 over 4000 is now 37%.  So, figure this percentage out before cancelling a card that you have, because it may be better off paying the card off and just not using it.

Other credit advice reading:

Credit Advice About Choosing A Credit Card

Understand The Simple Steps To Build Credit Scores

This is certainly more geared towards the guys, but once I saw the headline it made me want to read and share with everyone.

It’s a list of 5 things you can learn about credit from popular gangster movies.

Here is the link, enjoy!  Credit Advice From Gangster Flicks

One of the most important factors that affects your credit score is the total balances versus the total available credit limits.

Most people don’t realize that the balance on your credit card can affect your credit scores almost as much as a late payment.  Now, it doesn’t matter the balance on a specific credit card, unless you only have one card open, but the total amount of all balances of your cards versus the total available credit.

Example:  If you have 3 credit cards, all with credit limits of $1000, your total available credit is $3000.  If you have a balance of $300 on all three cards, your total balance is $900.  Take $900 (the total amount of balances) and divide that by $3000 (the total available credit) and you will get a percentage of 30%.  If this percentage exceeds 30%, it will start to affect your credit scores.

Some people ask if they should close a credit card account, because they don’t use it anymore or want to avoid using it.  Well, this could affect your credit score.

Take the example above and let’s say you transferred that $300 balance to one of the other cards and closed that credit card account.  Now, you have two credit accounts open, but you still have the same total balance of $900.  Take the $900 in total balances and divide that by the total available credit, which is now $2000 and the percentage becomes 45%.  This will affect your credit scores.

Before you close a credit card, figure out your total balances and total available credit, so you will know if it will affect your credit scores.

Learn more about credit:

Credit Advice About Choosing A Credit Card
Understand The Simple Steps To Build Credit Scores
Top 3 Things To Improve Your Credit Score

It’s important to our readers that you find all the mortgage advice and credit advice you can possibly find.  So, I have taken the time to list a few places that you should visit and soak up all the mortgage advice you can take.

Hope this helps!

Mortgage Advice Forums- I personally subscribe to this forum and help answer questions that people may have.  Bruce Brown, the creator, is very good at responding to everyone’s questions and concerns when looking for mortgage advice.

Zillow- Great place to get all kinds of advice, not just mortgage or credit advice.  Zillow has been around for awhile now and has been very popular with real estate in general.  If you haven’t heard of them yet, take the time to browse over the available advice and go from there.

Mortgageloan.com – I personally get many questions from the site, because of the amount of people that go to it for questions and advice.  Great place to soak in some more mortgage advice and mortgage news.

Lexington Law – Credit Report Repair - Credit advice for anyone that needs help with correcting things on their credit report.  What’s great about them is that you can call their 800 number and talk to someone that will tell you if they can help you or not, right from the start.

Ask Max – Very helpful information when it comes to credit advice.  There is also advice about paying off debt or debt consolidation.  I even browse this for myself from time to time.

Equifax - Not just a place to pull your credit report.  They have a learning center that is very educational for credit advice.  It also very important you look into identity theft protection, since this is the highest form of theft today.

This is a very serious topic and only getting more serious, because theft and fraud will only continue to increase while we are in a struggling economy.

This sentence alone should make you think about identity theft protection:

“Identity theft has become more prevalent, with nearly 10 million American victims losing $48 billion in 2008.”

We give credit advice on this blog, so we only thought it was only right to talk about identity theft protection.

The number of identity theft victims rose 22% to a record 9.9 million in 2008 from 8.1 million a year earlier, with about one in 23 U.S. adults becoming victims, according to the fifth annual study by Javelin Strategy & Research. (source: cnnmoney.com)

When it comes to a subject like identity theft, strong statements like, 10 millions American victims, should make you stop and think about looking into getting identity protection for yourself and your family.  Even though we can give you advice on what to do to correct your credit report, there is not much we can advise on when it comes to falling victim to identity theft.  The only cure is prevention.

ProtectMyId is an extremely good identity theft protection program.  Along with identity theft protection, you also get your 3 credit score reports and regular credit and theft monitoring.

If there is one thing that will only cost you a few dollars and help prevent a lot of frustration, time, and money it’s getting some sort of identity theft protection.

There is still one mortgage program that allows you to refinance without having to verify your credit scores. 

 Yes, you can have a credit score in the 500′s, or even lower, and still get approved for a mortgage refinance.

The only program that allows this approval is called a FHA Streamline Refinance.

What is a FHA streamline refinance?

It’s similar to a regular mortgage refinance, but your current mortgage loan that is being paid off has to a FHA loan as well.  So, you are basically going from an existing FHA mortgage loan to a new FHA mortgage loan.

Now, a streamline does not allow you to take any additional cashout.  The purpose of the streamline refinance is to lower your existing interest rate, if available at that time.

What are the benefits of doing an FHA stramline refinance?

The most popular reasons why someone would qualify for a streamline versus any other mortgage loan are the following:

• No credit score verification is necessary.
• No income verification is necessary.
• No asset verification is necessary.
• No home appraisal is necessary.

This program has become extremely popular for these types of people:

• If your homes value has depreciated to the point where you owe more on your mortgage than the home is worth.
• Self employed person.  It’s always difficult to verify income for these people.
• People with low credit scores.  As long as you are current on your mortgage.

The FHA streamline refinance will continue to be one of the most popular mortgage refinance programs on the market.  The mortgage rates continue to be at historic lows,  so anyone currently in a FHA mortgage loan will benefit from refinancing into these lower interest rates.

If you would like a second, or even a third, opinion on the refinance you are looking to do, please don’t hesitate to contact me.  On the top of this site, you can check out the list of states I’m able to help someone with financing.

We hear all the time that if you have credit scores in the 700′s, then you have excellent credit.  This is not always the case if you are looking for the absolute best interest rate for a mortgage loan.  You see, given the recent changes in the lending environment, the credit score has become more important than ever.

I’m going to lay out some very specific examples that show why a 700 credit score versus higher credit scores, means all the difference in mortgage interest rates.  You will also notice the thousands of dollars in savings, over the life of the mortgage loan, that is saved with a lower mortgage rate.

Now, let’s imagine for a moment that interest rates are determined by credit scores solely and not the other factors that usually go into determining your mortgage interest rate.  I say this, because mortgage interest rates can be a complicated beast.  I sometimes wish a customer could call me with the question, “What are your interest rates?” and I could give him/her a quick and simple answer.  Unfortunately, that question is not as easily answered as one would think.  Why?  Mortgage interest rates are determined by the following:

• Credit score.
• Loan amount.
• Property value.
• Type of property.
• Transaction type (cash out refinance, purchase)

…and these are not all of them.

Ok, let’s get back to the topic at hand…how important are credit scores?

First, remember that in the mortgage world, we go off the middle of the three credit scores.  So, if you happen to only know one of your credit scores, make sure you know all three credit scores from the three major credit bureaus.  Experian, TransUnion, and Equifax.

Everyone should check their own credit report for errors.  Especially, if you plan on applying for a loan in the near future.

Now, check out these 3 specific examples and notice the difference in interest paid, compared to the credit score.

 Example 1

Your middle credit score is 700.  The property you are buying is $250,000.  You are putting 5% down, so your loan amount is $237,500.  The interest for your 30 year fixed mortgage is 5.0%.  The mortgage payment (not including the property taxes, homeowners insurance, and PMI) is $1274.95.  The total amount of interest you pay just for the first 5 years is $57,090.31

Example 2

Your middle credit score is 720.  The property you are buying is $250,000.  You are putting 5% down, so your loan amount is $237,500.  The interest for your 30 year fixed mortgage is 4.75%.  The mortgage payment (not including the property taxes, homeowners insurance, and PMI) is $1238.91.  The total amount of interest you pay just for the first 5 years is $54,143.08

Example 3

Your middle credit score is 740.  The property you are buying is $250,000.  You are putting 5% down, so your loan amount is $237,500.  The interest for your 30 year fixed mortgage is 5.0%.  The mortgage payment (not including the property taxes, homeowners insurance, and PMI) is $1221.08.  The total amount of interest you pay just for the first 5 years is $52,672.05

The amount of interest you save in the first 5 years of your mortgage is $4418.26.  Want to know the savings over the life of the mortgage?

It will be in the next post.

Moral of the story:  Check your credit scores before applying for a mortgage, any loan for that matter, because it will save you thousands!

Currently, 70% of all credit reports contain errors due to poor credit management.

Get Your 3 Credit Scores Online Free!

Whether you are just starting to first build your credit history or starting over fresh, there are real simple steps you can follow that can easily increase your credit scores.  These are the steps everyone should follow, since this is how everyone’s credit scores are calculated.

Step 1 – Payment History (makes up 35% of your credit score)

Open an account where the payment history reports to all three major credit bureaus.  The three major credit bureaus are TransUnion, Experian, and Equifax.  This factor makes up the largest part of your credit score.  If you credit is so bad that you feel no credit card company will approve a card for you, then I highly recommend starting with a prepaid credit card.  Everyone is approved and the account history reports to all three major bureaus like any other major credit card account would.

Step 2 – Amounts Owed (makes up 30% of your credit score)

The total balances of all credit line accounts should not exceed 30% of your total credit available for all accounts.  These pertain to revolving lines of credit.  So, your mortgage, auto loan, etc. does not count as a revolving line of credit.  Here is an example to simply understand what this means:

Example:
If you had 3 credit cards, all with a $1000 credit limit for each, your total credit limit would be $3000.  If each of these credit cards had a balance of $500, then your total balance would be $1500.  So, your total balance ($1500) over your total credit limit ($3000), would be 50%.

Step 3 – Length of Credit History (makes up 15% of your credit score)

If you are just opening your first credit account, it only takes about 6 months for the major bureaus to credit your scores in a positive way.  You want to make 12 months of payments as a goal for a good length in credit history.  The longer your history, the more it will help to increase your credit score.

Step 4 – New Credit Accounts (makes up 10% of your credit score)

When you apply for multiple credit accounts in a short period of time, your credit score will be affected.  It’s not a dramatic affect on your credit score, but it definitely can lower your score.  You are viewed as a risk, because applying for too many accounts in a short period of time looks like a desperate move to access money.  I recommend no more than 3 inquiries when comparing companies.

Step 5 - Types of Credit Used (makes up 10% of your credit score)

There are a variety of credit accounts, like mortgages, credit cards, auto, etc.  When you have established a payment history in multiple accounts it helps show you can handle different types of accounts.  This will help to increase your credit scores as well.

This should help you to understand how your credit score is affected.  Once you see your first positive increase in your credit score, then you will realize this can be done!

Now, if you are someone that doesn’t want to take the time to do this yourself, that’s ok.  There are credit repair companies that do a very good job in helping you repair your credit scores.  In my years in working with credit, I would recommend the following:

Lexington Law – Credit Report Repair

I encourage you to leave a comment or question that you may have about credit scores.

Above is a chart that shows how the credit bureaus value the various parts of your credit in order to determine your score. Source: Fair Isaac Corp.

1. Payment History - Your history of making payments on time helps to increase your credit score the most. Typically, the last 12 months of payment history is much more important than any other history before the last 12 months. On top of that, it is more important to keep the mortgage payments on time than a credit card or energy bill.

2. Amounts Owed - This is the total balances of all revolving accounts over the total credit limits that are reporting. Revolving accounts are credit cards and personal lines of credit that you can draw on at any time and is an unsecured loan. A mortgage is a secured loan to your property and you are not allowed to used the remaining money you have paid down over time.

Example: Lets say you have 3 credit cards. Each of the three cards has a balance of $500, which gives you a total balance of $1500 for all three. Now, the credit limits of all three cards are $1500, so the total of all your limits is $4500. Take the total balance, $500, over the total limits, $4500, and your percentage of usage is 33%. It is said that you shouldn’t exceed 30% otherwise your score will start to drop, because the credit bureaus will thing you are charging more than you can handle.

Here is another thing to keep in mind. Lets say you transferred one of the $500 balances to another card and closed that card. You still have a total amount of $1500, but your total limit is $3000, since you only have two cards now. Take the $1500 over $3000 and your percentage is now 50%! There is nothing wrong with transferring a high interest rate balance to a lesser rate card, but don’t close the card where you transferred the money from. Keep the card open, put it somewhere where you won’t use it. If the credit card company gives you a hard time about not using the account after a certain period of time, then just charge something small once in awhile and keep the balance low, if not at $0.

3. Length of Credit History - This one is pretty self explanatory. The longer you have credit history the better, especially on a couple of credit cards. Opening a new account just to take the 0% interest for a short period of time and then closing it is going to hurt the part of “length of credit history”. To help offset this, you want to keep at least 2 credit cards open for a long period of time. 2 or more years is a good history to have. The bureaus won’t even grade a new account if it doesn’t have at least 6 months of payment history. For those people that are new to credit, like a college student, it is best to start at least one account and keep the balance low and payment history on time. By the time a year or two passes, he or she will have built up a decent credit history, even with one account.

These are also the types of things to keep in mind when trying to rebuild your credit for a mortgage refinance or buying a new home. If you are looking to refinance to get out of an adjustable rate or just trying to get a better interest rate, take the time to use this advice and get the credit scores as high as possible. This way you will save more money every month, along with less interest over the life of the loan.

If you liked this post, you should read Understand The Simple Steps To Build Credit Scores.