You may have heard that your credit score plays a large part in buying a home, but what is a credit score and why do lenders care about it? Spoiler alert, it all about the money. The FICO credit score analyzes the information on your credit report and tells the lender how likely you are to pay a bill on time or late within the next 24 months. Since taking out a home loan is often times the largest investment you’ll make, it makes sense why lenders need to know the likelihood of you paying back the loan.
What Factors Make Up Your Credit Score?
There are 5 factors that make up your credit score.
-Payment History - 35%
-Amounts Owed - 30%
-Length of Credit History - 15%
-New Credit - 10%
-Credit Mix - 10%
Payment History (35%)
Your bill-paying track record holds the most weight when determining your credit score. Therefore, on-time payment history is a great place to start if you are looking to lift your credit score. The scoring model looks at if there are any late payments on the credit report, and if so, how late were the payments, how long ago did the late payment occur, and how many total late payments on the credit report. A single 30-day late payment will not destroy your score if the other factors of your credit report are in good shape. The good news is that your credit score does take time into account. So, if you had a late payment far in the past, and have paid that credit line on time for years, the impact of the old credit mistake will shrink as time goes on.
Amount Owed (30%)
The amounts owed section of your credit score has to do with how much you owe on each credit line. If you have credit cards, keeping a low credit utilization ratio might help you earn a better score. As a rule of thumb, you should only allow 10-30% of your total credit limit to report every month. So if your credit card limit is $1000, only allowing up to $300 to report each month will help you more than if you let $700 report each month. Additionally, the amount owed section looks at the debt breakdown of the different types of credit on your account. These credit types include credit cards, mortgages, auto loans, student loans, etc.
Length of Credit History (15%)
Older accounts and an older average age of accounts can really help boost your score. While the FICO score does not take your physical age into account, the age of your accounts does play a role. Most people simply have to wait for time to do it’s magic for this category of the credit score. However, if you live with a significant other that is willing to put you as an authorized user on an older account, it can help speed up the process.
New Credit (10%)
Many folks know that checking your credit score often can negatively impact your credit score. That is true, but not always. When lenders check your credit, it counts as hard inquiries on your report and will remain on your report for 12 months. However, if multiple lenders in the same field (auto, home) check your score in the same 30 days, it will only hit your score once as it looks like you are shopping for a new car or home loan to the credit bureaus. It is best to only apply for new credit when you need it, but you also should not be afraid to leverage your good credit rating to sign up for an advantageous offer.
Credit Mix (10%)
While credit mix plays one of the smallest parts of your credit score, having experience in a variety of account can help lift your score. Different types of credit include credit cards, installment loans, retail cards, mortgage loans, personal loans, etc. If you have multiple types of installment loans on your credit report, and no revolving loans, it would be wise to look into applying for a new revolving loan and manage it well.
BONUS TIP: Did you know that everyone is able to receive a yearly copy of their credit report at annualcreditreport.com without it hurting your score? Grab a copy of yours, check out what’s hurting and what’s helping your score, and reach out to Hometown Lenders NW if you feel ready to start the home loan process!