Understanding Credit

: Chris Lee Law Firm

  Filed under: Credit Tips

credit scoreWhether you are applying for a credit card or mortgage loan, getting the best deal on the terms of your line of credit is important. No one wants to waste hundreds to thousands of dollars in outrageous interest rate fees, but getting a good deal isn’t always easy. The credit system is extremely sensitive to changes in your financial pattern and even minor negative remarks. This is especially true for anyone exiting a debt resolution plan or bankruptcy. However, you can get the best deal possible by first understanding the credit system.

The System

Your credit score is a numerical representation of your level of potential risk to creditors. In other words, it tells potential creditors the statistical likelihood that you will repay the credit that has been given to you. The most common credit score is called a FICO score, which ranges from 300 to 850; with the higher number being the better score.

There are numerous factors that go into calculating a FICO score. The total amount of debt you currently owe, the length of your credit history, the consistency of your payment history and whether you have any negative remarks or delinquencies on your accounts. An often overlooked aspect of how a credit score is calculated is the debt-to-limit ratio, which is the amount of debt you owe in relation to the maximum credit limit per account. If your debt-to-limit ratio is too high, your credit score will drop.

Working The System

The issue is that many people looking to take out a mortgage never consider their credit situation before shopping or putting in an offer on a home. The minimum credit score to qualify for a mortgage is 640, but lenders maintain the right to deny applicants even if they do maintain the minimum credit score. Therefore, before applying for a mortgage or credit loan, make sure your credit is in the best shape possible. Take extra time to clean up your credit and save for a larger down payment.



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