What Determines Your Credit Score?

What Determines Your Credit Score?

Your credit score plays an important role during the mortgage process. Having good credit shows lenders that you have experience paying back money you borrow (credit is what you receive as a borrower for paying your debts), can make monthly payments on time, and don’t have an imbalance in debt versus overall income (for example, a low debt-to-income DTI ratio).

There are actually a few different kinds of credit scores. FICO (formerly Fair Isaac Company) is the most commonly used credit scoring by lenders. Qualifying credit scores vary by lender, but they generally want to see FICO scores of 680 and above. An “excellent” score, which will give you the best mortgage interest rate, is a score of 720 and above.

To get your credit score where you want it to be, here’s a breakdown of how your credit score is determined so you can focus on the right areas. FICO will generate a credit report based on the following:

1. Payment History: Lenders want to know if you pay your bills on time. Late payments, collections, and bankruptcies can impact this portion of your credit report. To help your payments to be paid on time, set up auto-pay on your credit cards and bills.

2. Amount of Debt: You want a low “utilization” on your credit. This is the balance-to-limit ratio on your credit cards. Ideally, you don’t want to be utilizing more than 30% of your credit card limit at any one time. For example, if your credit card limit is $1,000, you should keep your balance to $300 or less at the billing cycle.

3. Credit History Length and Mix: Assess how long each of your credit cards have been opened and the various types of credit you have. This can include credit cards, other mortgages, student loans, auto loans, etc.

4. Recent Activity: Having a mixture of credit types can help your score if you pay balances off each month, but this doesn’t mean you should go and apply for and open a bunch of new credit cards today. Applying for a credit card and opening a new account may impact your credit score. It can be built back up overtime by making payments, paying off balances, and keeping your utilization low. But lenders want to see that you are managing your existing credit, not taking on a lot of new debt.

In the early stages of the homeownership process, you will be able to see your credit score and review your report. If you’re not where you want to be, you can work on improving your credit score within your home buying timeline helping you prioritize the areas you need to work on to increase your credit score in no time!