What Is A Credit Score And Why Does It Matter When Buying A House?
A Credit Score is a 3-digit number that uses many factors to rate the likeliness that someone will repay a dept or loan. The most common credit bureaus that are looked at when applying for a mortgage are TransUnion, Equifax and Experian. Most lenders look at all three scores then take the middle score to base your approval on. The higher the credit score, the less of a risk you are therefore the better your rates. There are a couple of structures as to how they get to this number, but the FICO system is mostly used in mortgages. A FICO credit score is made up of payment history, amounts owed, credit history, new credit, and credit mix.
Payment history has the largest impact on your credit score with 35%. Lenders like to see evidence that you have paid your past debt back on time. But don’t freak out! One or two late payments isn’t going to ruin your credit. Overall, on time payments will outweigh the one or two late payments.
Amounts Owed is the second largest factor to your credit score with 30%. This refers to how much total debt you carry. Being over extended does not help your credit score! Research has found that you only want to use about 30% of your credit. So, if you have a card with a large balance and another card with no balance, transfer balances to get all accounts to as close to 30% as possible. (If you have a $5,000 credit limit, you want your balance to be around $1500) Credit History makes up 15% of your credit score. Credit history refers to how long ago you opened your oldest and newest credit line, as well as how long it’s been since you’ve used the credit accounts.
After closing a credit account, it does remain on your credit history for some time but once it no longer appears, it no longer impacts your credit history.
A mixture of credit accounts such as credit cards, retail accounts and loans make up 10% of your FICO credit score. Having a good mixture, paired with good payment history, tells credit bureaus that you are able to manage different lines of credit, which lowers your risk of lending.
The last 10% of your credit score is new credit. Every time you an inquiry hits your credit, it will knock it down a few points. New accounts can also lower your credit score by decreasing your credit history so be mindful when opening new accounts.