Credit is an everyday reality. It helps us purchase cars, homes, pursue education, and maybe even your lunch today. But how well do you understand your credit rating and the factors that influence it?
If you’re like most people, you’re not clear on what shapes your score but when it comes to financing a home, it’s critical that you do. Your credit rating is represented by a numerical score that describes what type of risk you are for lending money. The higher your score, the more willing lenders will be to extend you a loan or a line of credit. The licensed loan officers at loanDepot can answer any question about how you can build or repair your score. Call (888) 983-3240 for more information.
Various third parties compile a variety of factors from your financial history to calculate your score. The most commonly known credit scoring term is a FICO score, named for the Fair Issac Corporation. In the 1950s, Bill Fair, an engineer, and Earl Issac a mathematician, developed a credit scoring system that went on to be the benchmark for all credit scores. FICO is actually the algorithm used by Experian and not the score itself.
The three biggest U.S. credit entities, Equifax, Experian and TransUnion, all use algorithms to judge credit scores, and lenders will use an average of all three as your “qualifying” credit score, which is used to determine whether or not they will provide you with a home loan and at what interest rate.
Though there are more technical programs in existence, such as FICO NextGen Risk Scores, most consumers receive their credit score in point ranges from 300 to 850; with the average score for Americans being 695 in 2015 (average scores fluctuate, depending on the year, but typically hover in the high 600s and low 700s).
How credit scores break down:
Understanding the range of scores and how they relate to obtaining a home loan only tells part of the story. It’s important to understand the factors that influence your score. Let’s look at some of the key influences of your credit score:
- Payment history on loans and other lines of credit. This accounts for roughly 35 percent of your credit score. This includes bankruptcies, delinquencies and payments that were past due. In fact, having any late payments, especially multiple late payments for the same lender, can seriously harm your score.
- Number of credit accounts and how much you owe on them. This accounts for approximately 30 percent of your credit score. This not only looks at your outstanding debt, but also how close you are to maxing out your credit for these accounts.
- Age and frequency of your credit and activity. This counts for about 15 percent of your credit score. Essentially the longer you have held a line credit the more it will benefit your overall rating. Using a credit card and regularly paying it off benefits your credit to an even larger degree, but simply holding onto credit still helps, so remember to hold onto old accounts, rather than close them.
- New accounts. This can sway your credit score by as much as 10 percent. If you apply for various lines of credit in a short amount of time, you will hurt your score. There is some nuance to this. If you apply for multiple student loans, it denotes that you’re seeking the best rate, and that would not negatively impact your credit score.
- Mix of credit. This impacts your score by 10 percent. The methodology takes into account your capacity to hold and responsibly manage different types of credit, including revolving debt, such as credit cards, and non-revolving debt, such as student loans and car loans.
Keeping your credit clean is a tough job, but if you know what helps it and what hurts it, you will be in better shape for the future. For more information about how a strong credit score can help contribute to your overall financial fitness, talk to a licensed loan officer at loanDepot by calling (888) 983-3240.
Published September 13, 2016
Homebuying checklist: 6 must-dos before buying
Buying a historic home - is it worth it?
Millennials: Where are they moving?
Home upgrades that deliver a solid return
DIY with care: 5 times it might be best to hire a pro