Factors of a Credit Score

 
 

Purchasing a home is a big investment. Therefore, lenders want to make sure you’ll be able to pay it back on time, and your credit score is one of the most important indicators of this.


Many factors go into your credit score each impacting your score differently.
• Your payment history,
• How much money do you owe compared to available credit?
• How long you’ve had credit?
• What different types of credit accounts do you have?
• How many new credit and loan are accounts you’ve opened?


The first thing you can do before starting to build up your credit is to open a checking or savings account if you have not already done so. Mortgage lenders will require this information to document your source of funds for a down payment.


When used properly, credit cards are a great way to build and improve credit. If you don’t have a credit card yet, try applying from a retailer or a secured card from a bank. Make sure to charge only what you can afford to pay in full, on time. If you carry a balance, you’ll end up paying interest on that purchase, which could cost you way more than the original purchase price. This will negatively affect your credit score. As credit card debt builds up, it becomes harder and harder to pay off. Generally, using 30% or less of available credit is favorable.


One of the most important factors in building credit: paying your rent, loan payments, and other bills on time. For revolving accounts, it’s very important to pay at least the minimum payments. (Revolving accounts are credit arrangements that require you to make periodic payments but do not require full repayment by a specified point of time.)


There are 5 major factors involved in a credit score.
• 35%: Types of Credit
o Having a combination of revolving credit cards and installment credit.
• 30%: Amounts Owed
o Keeping a high line of credit while maintaining a low credit balance.
• 15%: Length of Credit History
o Having an established credit history and maintaining a good record of payments.
• 10%: New Credit
o Can help improve creditworthiness but must not be used to pay down other credit.
• 10%: Payment History
o Never missing a payment, missing a mortgage payment alone can deduct 100 points.


By federal law, you can obtain a free credit report once every 12 months. You can get three free credit reports a year—one from each credit reporting agency via the Fair Credit Reporting Act (FCRA) website www.annualcreditreport.com. Information you will need includes; your address, Social Security number, birth date, and other basic identifying pieces of information. It’s a good idea to check your credit report regularly in case there are reporting errors.

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