When it comes to lending something that is personal, it is reasonable for any individual to be suspicious and careful. Not only is this the case when a middle class man has to lend a friend his precious new car, but also when banks give customers their appealing mortgage options. So the question is, how does one know who to trust? And to what extent can the trust be imposed? Luckily, a very valuable system called credit score has managed to solve this supposed problem of trust when it comes to lending, for commercial purposes if not personal, at least. In a nutshell, these scores are simply indicators of how well someone pays back their dues. One might ask, what is the importance of a good credit, then? Well, it can be thought of this way: Consider that someone has to lend their friend some money. If they never pay back on time, they probably wouldn’t consider giving it to them. But in the real world, it is impossible to know how trustworthy every single person is, so credit reflects the record of an individual’s payments and helps others decide if the scores are good enough evidence to them.
In practical life, especially in a place like the United States, merely anything requires the checking of one’s credit. So why is the credit score, a simple number, so important when it comes to mortgage? For starters, mortgage is an essential concept of living, which makes it much more common and in some cases, much more expensive. Due to this, it is imperative for banks and other financial institutions to trust who they give money to, and that is why a good score is so important. To derive one’s score, credit reporting companies send an individual’s credit information which is further processed in the FICO scoring model, creating the credit score. The report is very useful to financial institutions when they consider lending money because it includes a detailed history of one’s borrowed money and payment habits.
Though some might say that their credit solely determines their probability of getting good mortgage, it is not entirely true. Luckily, it is only another factor for consideration among others, such as income and other assets. But even though it may be only a part, it is an important one. Usually, having a score higher than 700 is when the best and lowest rates are enjoyed. Anything above 720 is excellent, moving to 700 which is good and eventually 640, considered average. It becomes very important to maintain a good credit because lending companies have consequences for both rise and decline of the score. For example, if someone’s credit moves from 660 to a 680, there will be a small bump in the rates offered. But if the score moved down the same amount, say to 640, the rates and costs will suddenly increase for the customer.
When the scores are already very high, getting a bump affects less compared to when the scores are lower. For example, if a person qualifies for something by having a score of 700, waiting to improve it to a 760 might not always be a good choice, because the difference would not be as huge. Additionally, if the rates rise meanwhile someone tries to increase their scores, it might be worse for them. Anyhow, credit is a fairly important component when it comes to mortgage and it can really affect the benefits one can receive. When getting mortgage, Debt to Income ratio, or DTI, can also be very important. The main purpose of this is to compare one’s debt and income. This serves as an essential factor for credit, because it lets the lenders know one’s financial position and liabilities. There are many ways to reduce this, for example, by paying off debts to improve the income. A good savings account can also make the DTI look less attractive, along with managing one’s expenses according to one’s income.
Since the credit is so essential, it is helpful to understand how individuals can work on it. Punctuality can be a very good thing in this case, because paying rent , credit cards and other payments on time can positively impact the score. Additionally, it is a good idea to not spend more than 30 percent of the credit card limit to stay safe. It also helps to have most mortgage plans shorter than the 30 day period, because having too many spread out ones can lower the score.