How is my credit score determined and How do I raise it?

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Your credit score plays a major role in many financial decisions you make throughout your life, especially when it comes to purchasing a home. It determines whether you are eligible for loans and the interest rates you will receive. Therefore, understanding how your credit score is determined and how you can raise it can drastically impact your financial wellbeing.

Credit scores are typically determined by the three major credit bureaus – Experian, Equifax, and TransUnion – using a formula called the FICO score. This formula considers five key factors, which are explained in more detail below.

  1. Payment history
    Payment history is the most significant factor affecting your credit score, accounting for approximately 35% of the total. This factor takes into account whether or not you have made payments on time and if you have any missed payments or a history of defaults.
  2. Amount of debt owed
    The amount of debt you owe to different lenders accounts for approximately 30% of your credit score. This includes outstanding balances on credit cards, loans, and mortgages. It also looks at the ratio of your outstanding debt to your available credit.
  3. Length of credit history
    Your credit history’s length contributes to approximately 15% of your overall score. This factor considers how long you have had your credit accounts open – the longer, the better.
  4. Types of credit
    Your credit score considers the types of credit you have used, accounting for approximately 10% of your overall score. This includes credit cards, loans, and mortgages.
  5. New credit
    Finally, new credit accounts for approximately 10% of your total score. It considers how many new credit accounts you have opened recently and how many credit inquiries you’ve made in a short amount of time.

    Now that you understand how your credit score is determined, it’s time to discuss some ways to raise your score.
  6. Pay bills on time
    As mentioned earlier, payment history has the greatest impact on your credit score. Therefore, paying your bills on time should be a top priority. If you struggle with remembering your due dates, consider setting up automatic payments or reminders on your phone.
  7. Keep credit card balances low
    Your debt-to-credit ratio is essential, so it’s crucial to keep your credit card balances low. If you can, try to pay off your credit card balance in full each month.
  8. Check your credit report regularly
    Mistakes on your credit report can negatively affect your score, so be sure to check it regularly for errors. If you do spot an error, dispute it as soon as possible.
  9. Apply for new credit accounts sparingly
    Applying for new credit accounts frequently can negatively impact your score. Instead, try to avoid opening new accounts and focus on paying off your current balances.
  10. Keep old accounts open
    As mentioned earlier, the length of your credit history accounts for approximately 15% of your score. Therefore, it’s best to keep your old accounts open even if you don’t use them anymore.
  11. Pay off outstanding debt
    It’s essential to pay off your outstanding debts to improve your credit score. Start with the accounts with the highest interest rates and work your way down.
  12. Aim for a higher credit limit
    If possible, try to increase your credit limit. This can help improve your debt-to-credit ratio, which is a crucial factor in determining your credit score.

    In conclusion, your credit score plays a significant role in many financial decisions throughout your life. Keeping track of your credit report and taking steps to raise your score can make a tremendous difference in your financial wellbeing. By paying bills on time, keeping credit card balances low, checking your credit report regularly, applying for new credit accounts sparingly, keeping old accounts open, paying off outstanding debt, and aiming for a higher credit limit, you can begin to improve your credit score over time.

What Homebuyers Need To Know About Credit Scores

If you’re thinking about buying a home, you should know your credit score’s a critical piece of the puzzle when it comes to qualifying for a home loan. Lenders review your credit to assess your ability to make payments on time, to pay back debts, and more. It’s also a factor that helps determine your mortgage rate. An article from Bankrate explains:

 “Your credit score is one of the most important factors lenders consider when you apply for a mortgage. Not just to qualify for the loan itself, but for the conditions: Typically, the higher your score, the lower the interest rates and better terms you’ll qualify for.”

This means your credit score may feel even more important to your homebuying plans right now since mortgage rates are a key factor in affordability, especially today. According to the Federal Reserve Bank of New York, the median credit score in the U.S. for those taking out a mortgage is 765. But, that doesn’t mean your credit score has to be perfect. An article from Business Insider explains generally how your FICO score range can make an impact:

“. . . you don’t need a perfect credit score to buy a house. . . . Aiming to get your credit score in the ‘Good’ range (670 to 739) would be a great start towards qualifying for a mortgage. But if you’re wanting to qualify for the lowest rates, try to get your score within the ‘Very Good’ range (740 to 799).” 

Working with a trusted lender’s the best way to get more information on how your credit score could factor into your home loan and the mortgage rate you’re able to get. As FICO says:

“While many lenders use credit scores like FICO Scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders may use to determine your actual interest rates.”

If you’re looking for ways to improve your score, Experian highlights some things you may want to focus on:

  • Your Payment History: Late payments can have a negative impact by dropping your score. Focus on making payments on time and paying any existing late charges quickly.
  • Your Debt Amount (relative to your credit limits): When it comes to your available credit amount, the less you’re using, the better. Focus on keeping this number as low as possible.
  • Credit Applications: If you’re looking to buy, don’t apply for other credit. When you apply for new credit, it could result in a hard inquiry on your credit that drops your score.

When you’re ready to start the homebuying process, a lender will be able to assess which range your score falls in and tell you more about the specifics for each loan type.

Bottom Line

With affordability challenges today, prioritizing ways you can have a positive impact on your credit score could help you get a better mortgage rate. If you want to learn more, let’s connect.