Your credit score is basically a numerical summary of your credit report. Whether you are seeking credit from banks, credit card companies, or car dealerships, all lenders use this score to determine the amount of credit, if any, that can be allocated. When buying a home, the higher your credit score the better.
What is considered a high credit score?
- Perfect credit score: 850
- Excellent credit score: 760–849
- Good credit score: 700–759
- Fair credit score: 650–699
- Low credit score: 650 and below
What factors are considered when calculating a credit score?
- Credit payment history (35%)
- Debt-to-credit utilization (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit accounts (10%)
So, what does this all mean?
It means it is time to become more knowledgeable when it comes to these factors, so let’s break them down:
Credit payment history refers to if an individual pays his or her credit cards on time.
Debt-to-credit utilization is the amount of debt an individual has accumulated, divided by the credit limit allocated on the accounts. NOTE: If your debt-to-credit utilization ratio is above 30%, this can have a negative impact on an individual’s ability to obtain more credit, and/or especially a home loan.
Length of credit history refers to the amount of time an individual has had credit lines open, but did you know longer credit history balances are more favorable than shorter ones?
Credit mix is literally the combination, or “mixture” of the different types of credit card accounts open, which can include but is not limited to store credit cards, auto loans, student loans, etc.)
New credit accounts obviously refer to when an individual opens a new credit line of some sort, but keep in mind, this may not always be a positive move, because each time an individual opens a new credit line, what was considered the average length of credit history decreases, which in turn negatively impacts the credit score. CONSIDER THE PROS AND CONS.
You may not become a “credit score guru” over night, but you can sure consider these factors and start making more favorable choices about your financial future. In fact, Experian found that 45% of people wait for their credit scores to improve before applying for a mortgage, so get a head start on your climb to the top! How?
CHECK YOUR CREDIT SCORE MANY MONTHS BEFORE YOU BUY A HOME. It takes time to improve it. Don’t kick back and hope that it improves, because as stated above, these factors are very significant to increasing your credit score and more importantly, for getting financing for a new home!