In this 'What to Know' series, we’ll cover credit scores, why they're important, and how they're affected.
What is a credit score? Credit scores are used to determine one’s creditworthiness, or how likely it is that they’ll repay debt. Your credit score is used by lenders to determine whether they will lend to you, and if so, on what terms. The score ranges from 300-850, with 700 and over generally being considered good scores.
Why is it important? When applying for any type of loan (auto, mortgage, credit card, etc.), your credit score is one of the most important determinants of the lender’s decision. When buying a home, your credit score is considered for your mortgage rate and minimum down payment.
Credit bureaus use complex formulas to come up with your score, but the top 5 components are:
Payment History (35%): Late payments hurt your credit score, while on-time and early payments help it.
Credit Utilization (30%): While your credit is what’s available for you to borrow, your credit utilization is how much of your credit is actually being used. Having high balances on your credit cards will negatively affect your score. In fact, Experian recommends keeping your debt under 6% of your total available credit.
Amount of New Credit (10%): If you open too many credit accounts within a short period of time, you present a greater risk to lenders and your score can decrease.
Credit Mix (10%): Your credit mix should be diverse. It should consist of revolving accounts, bank-issued credit card accounts, and installment loans, including mortgages.
Credit History Length (15%): The longer your credit history, the better.
Remember – your credit score isn’t the only thing that is considered when applying for a mortgage, but it is one of the most important. Be prepared for when the time to buy a home comes with our What to Know Series. If you’re ready to get started, contact us today to get in touch with one of our agents.