Building Healthy Credit
Your credit score is a number between 300 – 850, and the higher your credit score is, the better you look to lenders! Whether you want to buy a car, get a mortgage loan, or make payments on any large purchase, your credit score helps the lender evaluate your creditworthiness. Simply put, the lender wants to know what risk is involved in lending you money.
There are three main credit reporting companies (CRCs) that compile credit scores; Equifax, Experian and TransUnion. Each of these agencies generate a FICO® Score, VantageScore®, or another type of score; based on what scoring system the lender uses.*
The resulting scores from the three CRCs are usually not exactly the same, and the lender typically recognizes the mid-range score.
Bear in mind, there are other things the mortgage lender will look at. But, your credit scores play a significant role in your ability to obtain a home loan. Here are the five factors that make up your credit score, based on the FICO scoring model.
• Payment History = 35% of your score
This portion of your score tracks whether or not you make payments on time. This includes information reported from credit card accounts, retail store accounts, installment loans, loans from finance companies and mortgage loans. Late payments, collection accounts and bankruptcies have a negative effect in this area.
• Amounts owed = 30% of your score
This portion of the score looks at the total amount of money you owe. In regard to credit cards, this tracks the ratio of the amount of credit used in comparison to the amount of credit available. It also tracks installment loans (such as car loans), and how much is currently owed in comparison to the amount of the original loan.
• Length of Credit History = 15% of your score
This portion of your score takes into consideration how long you’ve had specific credit accounts, and the total average of all of those accounts. So, you don’t necessarily want to get rid of your old credit cards. That history could help you in this area.
• Types of Credit in Use = 10% of your score
This part of your score looks at the mix of credit you’re using and how you manage all of those credit lines together. If you’re just trying to establish credit, start by opening one credit account and make your payments on time before you add more credit lines into the mix.
• New Credit = 10% of your score
This percentage of your score looks at how many credit lines are new, and the number of inquiries that have been placed. For example, when you apply for a new credit card, student loan, auto loan or a mortgage, that’s considered to be a “hard inquiry”. Too many hard inquiries in a short period of time will lower your credit score. However, if you apply for a job and the employer does a background check, that’s a “soft inquiry”, which doesn’t affect your credit score. Also, if you check your own credit score, it does not lower your score.
There are many companies that advertise credit repair services and free credit reports. AnnualCreditReport.com was created by Experian, Equifax and TransUnion and is recommended by the Federal Trade Commission (FTC). This service entitles you to get a free credit report once every 12 months from each CRC.
It’s best to order all three credit reports at the same time ‒ six months before you apply for a home loan ‒ and examine them carefully. Remember, the higher your credit score is, the better it is for you when it comes time to apply for a mortgage.