Believe it or not, there are signs that the home buying season is starting. If you’re in the market for a new home this spring, one of the first things to take a look at is your credit score.
Your score is one of the important factors when it comes to borrowing money – it can determine whether or not you quality for a loan, the interest rate, and thus the amount you can borrow.
What is a Credit Score?
Your credit score is a three digit number calculated from your credit report. It’s a snapshot at a particular point in time that helps lenders evaluate your risk as a borrower.
FICO® stands for the Fair Issac Corporation – the largest and best known of several companies that provide software for calculating a person’s credit score. Not every credit score for sale online is a FICO® score, but it’s important to note that 90% of lenders use this score to make a credit related decision as your FICO® score estimates your level of future credit risk.
What is a Good Credit Score?
Base FICO® scores range from 300-850; the higher the number, the better the score. There is not a universal cut off on the scoring that all lenders use. They factor in a number of things like income, length of time at your present job and type of credit you’re requesting when making their decision. But here is a general guide:
- Excellent Credit: 750+
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
How Your Credit Score is Calculated
Your credit score is compiled from five categories grouped form the data in your credit report.
Payment History – 35%
Accounting for the largest percentage, your payment history is one of most important factors in your FICO® score. This percentage takes into account if you’ve made your payments on time, if you’ve missed payments, how many days past the due date you paid your bills and how recently those payments were missed.
A late payment here or there is not automatically a score-killer, as a good overall credit profile can compensate for this.
Amounts Owed – 30%
The second largest percentage of your score, amounts owed accounts for 30% of your credit score. This is based on the entire amount you owe on all your accounts compared to your available credit, as well as what you owe on specific types of accounts, such as credit cards and installment loans.
Cards with a high credit utilization ratio, like high balances or maxed out cards, can lower your score. Additionally, having a large number of accounts with balances (even if they’re not high) can indicate someone who’s at risk for over-extension.
Length of Credit History – 15%
The longer your history of making timely payments, the higher your credit score. FICO® takes a number of factors into account when calculating this part of your score including:
- How long your credit accounts have been established
- Time that’s passed since you used each account
- Length of time your accounts have been established, including age of your oldest and youngest account and the average age of all accounts.
While it may seem contrary, avoiding applying for credit and carrying some debt can actually hurt your score as lenders have no credit history to review.
Credit Mix – 10%
FICO® Scores will consider the types of credit that you have including credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Having a mix of these cards may improve your score, but it’s not necessary to have one of each, so don’t open accounts you don’t intend to use just to have them on your report.
New Credit – 10%
New credit makes up the final 10% of your credit score. Opening or applying for a lot of new accounts can signify financial trouble and lower your score. Having a number of new accounts can also lower the average age of your accounts factored in your length of credit history.
The score does allow for “rate shopping.” For example, if you’re applying for a mortgage, all inquiries related to a loan over a 30 day period account for only 1 inquiry. According to myFICO, “If you need a loan, do your rate shopping within a focused period of time, such as 30 days.”
While inquires remain on your credit report for two years, FICO® score only consider inquiries for the past 12 months.
Checking Your Credit
As the article suggests, having the best credit score should be a priority when one starts the home buying process. You can order your credit report directly from a credit reporting agency (Experian, Equifax, TransUnion) or through an organization like myFICO. Be aware that the information that lenders use to assess your creditworthiness may be different from what you will see in the credit reports you pull.
If you’re ready to start the process, contact us today to receive your complimentary credit report.