Howard Financial


Mortgage Planning That Makes a Difference

Start the New Year with a Clean Slate

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As we step into a new year, it’s the perfect time to focus on understanding and improving your credit score. Whether you’re planning to buy a home, refinance, or simply enhance your financial health, your credit score plays a pivotal role in shaping your opportunities. Let this be the year you clean up your credit and take control of your financial future!

What is a Credit Score?

Your credit score is a three-digit number, typically ranging from 300 to 850, that represents your creditworthiness. It’s used by lenders to assess how likely you are to repay debts on time. Scores above 700 are generally considered good, while scores above 800 are excellent. A strong credit score not only increases your chances of mortgage approval but also helps you secure better interest rates, potentially saving you thousands over the life of your loan.

How is Your Credit Score Determined?

Credit scores are calculated using five key factors:

  1. Payment History (35%): Paying bills on time is the most critical component. Late payments, defaults, or bankruptcies can significantly lower your score.

  2. Credit Utilization (30%): This measures the percentage of your available credit you’re using. Keeping utilization below 30% can boost your score.

  3. Length of Credit History (15%): A longer credit history can positively impact your score.

  4. Credit Mix (10%): A mix of credit types, such as credit cards, auto loans, and mortgages, can benefit your score.

  5. New Credit (10%): Frequent credit inquiries or opening multiple accounts in a short period can lower your score.

Why Cleaning Up Your Credit Matters in the New Year

The start of a new year is a great time to review your financial health and set goals. Cleaning up your credit ensures you’re ready for major financial decisions, like applying for a mortgage or refinancing an existing loan. Even small improvements can make a big difference in the interest rates you’re offered, saving you money in the long term.

Steps to Clean Up Your Credit

Here’s how you can start improving your credit score this year:

  1. Check Your Credit Report
    Begin by obtaining a free copy of your credit report from AnnualCreditReport.com. Review it for errors, such as incorrect account information or unauthorized activity, and dispute any inaccuracies with the credit bureaus.

  2. Pay Bills on Time
    Make paying bills on time a priority. Set up reminders or automatic payments to ensure you never miss a due date.

  3. Reduce Debt
    Focus on paying down credit card balances to lower your credit utilization rate. Aim to use less than 30% of your available credit on each card.

  4. Avoid New Credit Applications
    While it may be tempting to open new accounts, avoid applying for credit unless necessary. Multiple inquiries can temporarily lower your score.

  5. Keep Old Accounts Open
    The length of your credit history matters, so avoid closing older accounts, even if they’re no longer in use.

  6. Monitor Your Credit Regularly
    Keep an eye on your credit score throughout the year. Many banks and credit card issuers offer free credit monitoring tools to help you track your progress.

How a Better Credit Score Benefits You

Improving your credit score isn’t just about meeting lender requirements—it’s about gaining financial freedom. A higher score can:

  • Qualify you for lower mortgage rates.

  • Increase your negotiating power with lenders.

  • Provide access to better credit cards and loan products.

  • Improve your overall financial confidence.

This New Year, commit to cleaning up your credit score as part of your financial goals. By understanding how your score works and taking proactive steps to improve it, you’ll set yourself up for success in 2025 and beyond. Whether you’re dreaming of homeownership or just aiming for better financial health, a strong credit score is your ticket to achieving your goals.

The Differences Between Hard and Soft Credit Inquiries

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Credit inquiries, also known as credit pulls or checks, are a standard part of assessing creditworthiness. However, not all credit inquiries are the same. They fall into two main categories: hard and soft credit inquiries. Understanding the differences between these two types is crucial for managing your credit health and avoiding misconceptions. Below, we explore the distinctions between hard and soft credit inquiries to provide clarity on their purpose and impact.

1. Purpose and Usage

Hard and soft credit inquiries serve different purposes.

  • Soft Inquiries: These occur in situations like checking your own credit score, background checks by potential employers, or pre-approval offers from financial institutions. They are typically informational and not tied to major financial decisions.
  • Hard Inquiries: These are required when applying for a new line of credit, such as a mortgage, car loan, or credit card. Lenders use hard inquiries to evaluate your financial history and determine your loan eligibility and terms. While hard pulls are essential for lending decisions, they temporarily affect your credit score.

2. Impact on Credit Score

The effect of credit inquiries on your score is another significant difference.

  • Soft Inquiries: These have no impact on your credit score, regardless of how often they occur. For example, you can check your credit score frequently without concern, as soft pulls are unrecorded on your credit report. Institutions conducting soft inquiries without your explicit permission also don’t harm your score.
  • Hard Inquiries: These can lower your credit score, typically by one to five points per inquiry. While the impact is temporary (about one year), hard pulls remain on your credit report for two years. Excessive hard inquiries in a short period may raise red flags for lenders, suggesting financial instability or risky borrowing behavior.

3. Consent Requirements

Whether an inquiry requires your permission is another key distinction.

  • Soft Inquiries: These often occur without your consent. For example, financial institutions may perform a soft pull before sending pre-approval offers, or an employer may check your credit as part of a background screening.
  • Hard Inquiries: These require your explicit consent. For instance, when applying for a mortgage or car loan, the lender must inform you that a hard credit check will be performed. This ensures transparency, as hard inquiries affect your credit score.

Understanding the differences between hard and soft credit inquiries empowers you to make informed decisions about your credit health. Soft inquiries are harmless and routine, while hard inquiries should be minimized to maintain a strong credit profile. By managing your credit wisely, you can position yourself for financial success.

Will Refinancing Impact Your Credit?

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Refinancing a mortgage can provide significant financial benefits, such as lowering your interest rate or accessing home equity. However, it’s important to understand how the process may temporarily affect your credit score. Here’s an in-depth look at the potential short- and long-term effects of refinancing on your credit, along with tips for minimizing any negative impacts.

What Does It Mean to Refinance a Mortgage?

When you refinance, you replace your existing mortgage with a new loan. Homeowners refinance for a variety of reasons, including:

  • Lowering their interest rate
  • Changing the loan term (e.g., from 30 to 15 years or vice versa)
  • Accessing home equity through a cash-out refinance

There are two primary types of refinancing:

  • Rate-and-Term Refinance: Adjusts the loan’s interest rate, term, or both. For example, refinancing to a lower rate can reduce monthly payments, or switching to a shorter term can save on long-term interest costs.
  • Cash-Out Refinance: Lets homeowners borrow against their home equity, receiving the difference between the current loan balance and the new loan amount as cash. This option is commonly used for home improvements, debt consolidation, or large expenses.

How Does Refinancing Impact Your Credit?

Refinancing can have both short-term and long-term effects on your credit. While the short-term impacts are usually minor and temporary, it’s helpful to understand the details.

Short-Term Impacts

  1. Hard Credit Inquiries:
    When you apply for refinancing, lenders conduct a hard credit inquiry to assess your financial profile. This can temporarily lower your credit score by five to ten points. Multiple hard inquiries in a short time frame may have a larger impact, so it’s best to avoid shopping for other credit during this period.
  2. Credit Age:
    Refinancing creates a new loan account, which may lower the average age of your credit accounts—a factor in determining your score. If you don’t have other long-standing accounts, the impact may be more noticeable.
  3. Credit Utilization:
    If you choose a cash-out refinance, your total debt increases, which can raise your credit utilization ratio. This ratio is a key metric in calculating your credit score, so higher utilization can temporarily lower it.

Long-Term Benefits

Despite the initial dip, refinancing can improve your credit and financial health in the long run:

  1. On-Time Payments:
    Payment history is a major factor in your credit score. Regular, on-time payments on your new loan will strengthen your score over time and offset any short-term declines caused by the refinance process.
  2. Improved Debt-to-Income (DTI) Ratio:
    Refinancing to a lower interest rate reduces your monthly payments, freeing up income and improving your overall financial flexibility. While DTI isn’t part of your credit score, it’s an important factor for future loan approvals.
  3. Debt Consolidation with Cash-Out Refinance:
    Using a cash-out refinance to consolidate high-interest debts can lower your credit utilization ratio and boost your score. However, weigh the risks carefully, as this initially increases your total debt.

Avoid New Credit During Refinancing

Applying for additional credit, like a car loan or credit card—while refinancing can harm your credit score and disrupt the loan process. Lenders may view this as increasing your financial risk, which could jeopardize your approval.

While refinancing may result in a temporary dip in your credit score, the long-term financial benefits often outweigh these short-term effects. By understanding the process and managing your credit wisely, you can make the most of refinancing opportunities and position yourself for future financial success.

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