Sports and financial markets are obsessed with statistics. A day doesn’t go by without some oddball record or data point being tossed around across financial media and sports networks alike. Most are worth tuning out, but this one recently caught my attention: the average age of a first-time home buyer in the US is now 40 years old. This is an all-time high and a stark uptick from the average in 1991, which was 28 years old.
One of the most popular questions I get from 40-year-olds today is regarding how to prepare for or execute the purchase of a new home. I guess my experience is representative of this statistic. When discussing this topic, one’s credit score becomes a very important component. Surprisingly, many 40-year-olds are not well-versed in exactly how credit scores work. I know this to be true because I am 40 years old, and I was in dire need of a credit score refresher about a year ago. I think the backstory here will add some context and lightheartedness to this topic.
My family and I had made a few trips up to Idaho over the last couple of years, and we decided that we wanted to buy a second home up that way. My wife and I flew up to look at some properties and stumbled upon a home we fell in love with. It was the real estate agent’s personal home; she was willing to leave it furnished and to manage the property as a short-term rental for us. The stars aligned, and we were ready to pull the trigger.
The next decision was how to finance the purchase. I was quite experienced in mortgages, having worked for a bank, purchased homes personally, and guided countless clients through the process. So I contacted one of our external partners to tee up the applications process. I collected the docs, filled out the paperwork, and got the ball rolling. In preparation, I naturally checked my credit score and was unpleasantly surprised to see it had taken a significant dip.
But why? What exactly happened? What was impacting my score?
I think the assumptions here would be of some sort of missed medical payment or something of that nature that slipped through the cracks, but that wasn’t it. It wasn’t a lack of credit history, as I’ve had credit cards for decades, and I purchased two other homes in the last 4 years or so. I simply couldn’t figure out what it was, so I called a friend who works at one of the credit bureaus to help me sleuth through the mystery.
I sent him screenshots, records, etc., and we were both a bit stumped. My score had dropped some 80 points recently, and there was no clear or obvious reason why. This launched me into a refresher course on what exactly drives one’s credit score.
Eventually, the riddle was solved, and here’s what happened. In an effort to simplify my bookkeeping, I consolidated all my purchases onto one credit card. A few other cards then became dormant, which led to the credit card companies shutting the cards down. This had a two-fold impact: it lowered my average credit age, and it lowered the total credit available to me. That latter point was very impactful because the total credit available is the denominator for the “credit card usage” calculation. Basically, current credit card balances are divided by the total available credit. A simple spike in credit card usage (balance/available credit) had a meaningful negative impact on my score.
I’ve always paid on time, had available credit, and paid the full balance each month, but it was just that simple ratio calculation that was skewing my score. The solution was simple: I just started paying the balance weekly so that, when the next report was published, my credit usage figure would be sub-5 %. Sure enough, this micro change spiked my score nearly 100 points and allowed me to proceed with my desired financing option.
As you can see from my story, I truly did need a credit score refresher. I found the whole thing a bit silly – how scores are determined and calculated – but I now also felt more equipped and empowered to help a client or friend navigate these waters in the future.
For those interested, we are a bit over a year into owning this property, and it has been an absolute blessing to our family and the friends we’ve shared it with 🙂
So, with my story in mind, I thought it would be fitting to give you a shorthand note on how credit scores work and what exactly you should be aware of. Sure, making payments on time and building a long and robust credit history are crucial, but there are other metrics that play an important role, too.
Here’s that short list:
- Always make on-time payments to retain a strong payment history, be organized and be on top of it; don’t let anything slip through the cracks.
- No derogatory marks, stay away from over-borrowing or ever risking a potential loan default.
- Strive for an average credit age for your open lines of credit of 9+ years, which means you should avoid closing cards with a long history or opening new cards that may be unneeded or redundant.
- Work to build a diverse and robust credit history with 20+ total accounts (the summation of current and legacy accounts).
- Limit your hard inquiries, which are when an institution pulls your credit history in response to your request to potentially borrow.
- Keep your credit card usage below 9%. Again, this is your current credit card balances divided by your total available credit.
To drive your familiarity and comfortability, I’d encourage you to engage with an app that allows you to check your score regularly and highlights what is positively or negatively impacting your score. Credit scores fall into the “proactive” bucket, meaning you want to proactively boost your score when you don’t need credit, so that you are prepared when the need does arise.
Again, as you saw with me, even something as silly as paying off a balance weekly versus monthly can have a near 100-point impact.
So, if you are 40 and interested in buying a home, or you know a 40-year-old who’s interested in buying a home, hopefully, you are now better equipped on how to prepare your credit score for that crucial time.
As always, feel free to reach out with questions.
Until next time…
