Here’s a little bit of brutal truth about me: I’m not great with money. I’ve overspent and lived beyond my means for years at a time. I've let debts lapse into collections. I’ve knowingly run up credit card bills without having funds to pay them off. I’ve had my utilities turned off... more than once. In short, I’ve lived the life of a brokeass. Brokeass-dom is not simply about being poor, but also irresponsible with what you DO have. It took me a long time to hold myself accountable for the stupidity of my brokeass years. But now that I’m wiser and less cocky, it’s time fix these screwups once and for all. And now, a warning: The below statement is most definitely a cliche.
You’ve got to start somewhere.
Cliche or not, it’s true. And it’s the double, triple truth for home buying. For years, I’ve been saying it to myself and to any coworker, family member or friend that would even half-listen: All I want is a house to call my own; to decorate and walk around in my underwear in. But it’s all talk until, well, that talk becomes action. It took me awhile, but finally in August of 2012, I did the unthinkable: For the first time ever, I checked out my credit report to see how the unseen, unknown bureaucrats ranked me.
And... I had median score of 520.
A 520 is not the credit score anyone wants to hear. It’s pretty bad. Not “I’m a felon who’s never had a straight job and has had their identity stolen four times” bad, but brokeass bad. Literally 120 points BELOW THE MINIMUM needed for any bank to take me seriously. It’s almost funny (and yet not at all funny) that a three-digit can have so much power.
So what is a credit score anyway? Why is it so important to the mortgage process? And what does it seem so difficult to have the right number?
Your credit score (sometimes called a FICO score) is a three-digit number, ranging from 300 to 850. There are three main credit bureaus that you’ll soon become familiar with. They are Transunion, Experian, and Equifax. The hows and what-fors of these bureaus (and why there’s THREE of them) means nothing to me in the greater sense that understanding how they work won’t actually help you get a mortgage. But, for the curious, check out this HowStuffWorks article on the topic.
Each credit bureau uses some super secret algorithm (voodoo) to determine a numerical rank based on a number of factors including:
- How many accounts you have.
- The age and current balance of your accounts.
- How on-time you’ve been with your credit card, utility and car loan payments.
- How many derogatory marks (or bad debts) you have.
- The status of your accounts (paid off, current, closed, etc.)
Each bureau’s scores can be different, and they usually are. But they mostly fall within a 10-20 point range of each other.
Most credit help websites won’t come out and directly say that a low score is “bad,” but there are ranges. On the credit watch website Credit Karma, an offshoot of Transunion, their range falls into four categories: Very Poor, Poor, Good and Excellent. Even a brokeass can intuit that one won’t qualify for a mortgage with a score in the Very Poor or Poor range.
I’ve been told time and time again that 640 is the magical credit score number. Most banks or mortgage lending agencies won’t even consider you as a potential client unless your median score hits this target. Your median score is basically whatever number falls between your highest and lowest score. Like this.
- Transunion = 630
- Equifax = 640
- Experian = 650
The Equifax number, the one in the middle, is your median score. This is the one that your mortgage dude will focus on. It’s basically the minimum place you can be for the underwriters (moneybags) to know that you’re worth the risk they’ll be taking on. The higher the number, the more they’re confident that you’ll be able to meet the financial obligations of a mortgage contract.
...back to August 2012. I’m staring at a 520 score on my computer screen and I die just a little bit. All those little mistakes... old Target card accounts, medical bills, a Capital One card I completely forgot about, every time I missed a utility payment... they were all there waiting for me. Tiny little nightmares in black and white.
Clearly, I had some work to do. But I took the first step. And the first might be the most important step of all.
Wow, I’m just dripping with life lessons (cliches) today.
So we’ve all gotta start somewhere. And the fact that you’re reading this right now? This can be the somewhere you start. See? I’ve already tricked you into taking the first step. That wasn’t so hard, was it?
Now it’s time for you to find out YOUR credit score. Visit annualcreditreport.com to get yours free. Keep in mind that this is not a scam or paid post. This is the website that the Department of Housing and Urban Development (HUD) tells you to go to. You only get one free one each year. Eventually you WILL have to pay for additional reports if you want to continuously monitor your score. Take advantage of the freeness when you can.
When you get your report, print out a hard copy. Put it in a binder or folder marked “Dream House.” This is the start. It’s official. You are on your way.
In the next installment of Home Buying for Brokeasses, I’ll be getting into the nitty gritty of how I began to fix my credit score... and what you can start doing today to fix yours.
Obligatory disclaimer: Always keep in mind that I am no way, shape or form a financial expert. All my advice and suggestions should be taken with many grains of salt. Everything I write is based solely on what worked for me. Consider seeking professional credit counseling before making any big financial moves.