Do You Know What’s Affecting Your Credit Score?

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As you get ready to purchase a new home, it’s important to tackle your credit score head-on. Your score will determine your interest rates, and better rates mean you’ll pay tens of thousands of dollars less over the lifetime of your mortgage. 

The great news is your credit score doesn’t have to be a mystery. The credit bureaus use the following five factors to determine your rating ( with the first two playing the biggest roles). 

The Amount of Your Debt 

Lenders like to see that you don’t have a lot of debt. In general, those who have less debt have higher credit scores. However, they’re looking at your debt as a percentage of your total available credit. For instance, if a person has a $400 balance on a card with a $500 credit limit, the credit bureaus will not like what they see. Surprisingly, someone with a $1,000 balance and a $20,000 limit will look better, even if the person technically has more debt than the person with the $400 balance. 

That’s why it’s so important to look at your overall debt-to-credit ratio. If you have a low-limit card because you’re just starting out and trying to build credit, you should only be using it to make minor purchases, then paying off the balance each month. This keeps the debt-to-credit ratio low while still showing you can use credit responsibly. 

Whats Affecting Your Credit Score Liquid Crystal Display ImageYour Monthly Payments 

Whether or not you pay your bills on time plays a big role in your score. Obviously, if you make frequent late payments a lender is going to be wary of giving you money. On your credit report, there are little boxes for each month and there’s a note on whether you paid on time, or if you were 30 days late, 60 days late, or more than 90 days late. These notes stay on your report for around seven years, so those late payments will stay with you. 

If you’ve made mistakes in the past, you can start to reverse the trend by committing yourself to paying on time. Little by little, your credit score will start to improve, and the late payments recorded long ago will start dropping off, giving you a longer and longer history of on-time payments. 

The Length of Your Credit History 

The more data the credit bureaus have to work with, the better they can understand your behaviour. This means those with a longer credit history tend to have better scores. Young people and others who are getting their first credit cards or applying for their first loans are at a disadvantage, but the situation does improve over time. 

One thing to watch out for is cancelling credit cards you’ve had for years. Sometimes people cancel a card because they don’t use it anymore or because they’ve found a card that offers a better deal. Removing this card from the report can make it look like you have a shorter credit history than you do. Try to keep cards open unless they’re charging you an annual fee. 

Whats Affecting Your Credit Score- Business Partners Table ImageThe Types of Credit You Have 

There are two main types of credit: installment loans (or debts), where you receive a lump sum of money for something like a car or your college education, and revolving credit, where you have a set credit limit but can charge only what you need. Installment loans have a set payment each month. Revolving credit accounts will give you a minimum balance due, but you’ll be able to pay more if you can. 

Ideally, credit bureaus will reward people who have a mixture of these types of credit. However, you don’t necessarily want to apply for something new just to increase your mix. 

Inquiries Into Your Account 

When you apply for new credit, the lender makes an “inquiry” into your account. If you have a lot of inquiries into your account, it can decrease your credit score. It looks like you’re scrambling for money, and the lenders start to think that you might not be able to pay it back. 

Obviously, when you’re applying for a mortgage or a car loan, they expect you to apply with different lenders to compare rates, so you’re not penalized for this the way you would be if you suddenly applied for 10 different credit cards. 

Your credit score is extremely important in the home buying process. Take care to improve it before you begin to apply for your mortgage, and you’ll be in great shape when it’s time to look for your new home.{{cta(‘bf36d1ad-aee8-4adc-b7a9-a32ba68fe3f8′,’justifycenter’)}}

Photo credit: credit score, liquid crystal display, business partners
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