Your credit score is a powerful three-digit number that affects many aspects of your life. Lenders use it to decide whether you get approved for a loan and at what interest rate. If you're shopping for Ann Arbor homes for sale, it's important to know what affects your credit score and the dos and don'ts of improving your creditworthiness. The 5 biggest factors that go into how your credit score is determined are:
- Payment History
Your payment history is the most important component of your credit score and determines 30% of your credit history. This scoring factor is used to forecast future long-term behavior. It looks at whether you can be trusted to repay the loan. FICO scores look at the amount of overall debt you carry, your credit card balances, credit limit, and the relation of your balance to the original loan amount.
Missing a credit card payment or having too much debt can greatly hurt your credit score. The effects are determined by the amount you owe and the length of time that a bill goes unpaid. One of the best ways to improve your credit score is to start making consistent, on-time payments. If you actively pay down your balances, the impact on your scores can diminish over time.
- Credit Utilization
The amount you owe on installment loans determines 30% of your credit score. Your credit utilization rate is the ratio of your credit card balances and your total credit limit. You should maintain your credit card utilization at 30% or less of any card's available limit. Borrowers who habitually exceed this limit are typically viewed as people who cannot handle debt responsibly. Maxing out your credit cards will increase your utilization rate and hurt your scores. It's best to keep your credit utilization rate low.
- Length of Credit History
Your credit score also takes into account the length of time each account has been open and active. Credit age makes up 15% of your total credit score. This component considers the age of your oldest account as well as the average age of your combined accounts. A longer credit history provides a better picture of long-term financial behavior.
If you don't owe too much or your credit is not marred by late payments, an older credit age shows that you have extensive experience handling credit. Closing existing accounts or opening new accounts can lower your average credit age and hurt your scores. Maintaining long-standing accounts and using them will help boost your scores.
- New Credit
New credit accounts for 10% of your FICO credit score. FICO looks at the last time you opened a new account and how many new accounts you've applied for. This doesn't mean that opening new credit accounts will improve your score. In fact, applying for new credit lines at the same time could suggest that you're in financial trouble or planning to take on lots of new debt. Don't open new accounts unless there's a good need to do so.
- Types of Credit in Use
Types of credit in use make up the last 10% of your score. Having a mix of different types of credit, like credit cards and installment loans, will help improve your credit scores. This is because borrowers with good credit mix and have managed their accounts responsibly represent less risk for lenders. Since your credit mix is a small component of your score, you probably shouldn't open new accounts, take out loans, and pay interest just to increase your mix of credit types.
If you identify areas of improvement and manage your credit responsibly, your credit health will shine across the board. Our REALTORS® are experienced in the finance processes of real estate transactions and can guide you through the mortgage application process. Contact us today to get started.