5 Factors that Go Into Your Credit Score

Did you ever view a breakdown of what factors go into your credit score? Knowing how your credit score is calculated can help you improve your score. You may be able to strategically work your finances to lift your credit score by targeting the specific areas that contribute to your score.

How Does Your Credit Score Impact Your Experience Buying a Home?

If you’re going to be financing your real estate purchase with a mortgage loan, your lender will evaluate your borrowing capabilities based on your credit score. In this way, your credit score is how you introduce yourself to lenders.

The loan officers reviewing your lending application will use your credit score to determine your likeness to pay back what you’ve borrowed. There are a few different companies that calculate your credit score, but most mortgage lenders will usually look at your FICO® Score.

• If you have a weak credit score, lenders may view you as a higher-risk borrower and take steps to protect their financial interests. In these cases, your lender may impose a higher interest rate on what you’ve borrowed, require certain protective policies, and charge additional fees.
  
• On the other hand, borrowers with strong credit scores are perceived to be less risky by lending institutions. When you have a high credit score, you may gain access to preferred loan terms like reduced interest and waived fees.
  

Many home buyers choose to invest time in building up their credit score in advance of applying for their mortgages to save money in interest down the line and secure better loan terms.

The 5 Things That Make Up Your Credit Score

If you know what goes into your credit score, you can help improve your score before getting a mortgage to buy a home. Here are the five things that impact your credit score.

Payment History Makes Up 35% of your Credit Score

Payment history is the largest component of your FICO score. Your payment history tells a mortgage lender whether or not you’ve made timely and complete payments to your credit accounts in the past.

If you want to clean up your credit before applying for a mortgage loan, spend time making sure that all of your credit line payments are being submitted on time. This can affect the largest portion of your score’s calculation, so it’s an effective way to improve your FICO® score. Being even a day past day can negatively affect the payment history component of your credit score.

Amounts Owed Makes Up 30% of your Credit Score

After payment history, amounts owed are the second biggest contributor to your credit score.

It’s important to understand that owing money to your credit accounts does not necessarily indicate that you’re a high-risk borrower. What lenders are looking out for is when you have high credit utilization, meaning you’ve used a lot of your available credit. That may be a red flag that you’re at risk of defaulting on your loans because you don’t have the money to pay back what you owe.

If you want to improve your credit score, work to lower the utilization on each of your credit lines. Avoid having high utilization on credit accounts by consolidating your debts before applying for your mortgage.

Length of Credit History Makes Up 15% of your Credit Score

Length of credit history makes up 15% of your credit score. Typically, the longer you’ve had a credit history, the stronger this aspect of your credit score is. However, you don’t necessarily need to have a long credit history to have a strong credit score.

This portion of your credit score will evaluate the length of time each of your credit accounts has been active, and when the last time you used your account was. Length of credit history will also evaluate how long you’ve had your oldest credit account, and how long you’ve had your most recent account open.

Credit Mix Makes Up 10% of your Credit Score

Making up 10% of your credit score, the credit mix looks at the different types of accounts that you have active. According to FICO®, this portion of your credit score factors in your mix of revolving credit accounts — such as credit cards, retailer accounts, or HELOCs — and installment loans — like student, auto, and mortgage loans.

New Credit Makes Up 10% of your Credit Score

If you suddenly open up multiple new credit accounts at the same time, it’s a red flag for lenders. It may seem like you’re not financially stable, or it may be more difficult for you to pay off what you’ve spent on your new credit lines. To take this into account, your new credit makes up 10% of your overall score.

If you have more questions about how you credit score can affect you ability to purchase a home, it may be time to connect with a top real estate agent from RealEstateAgents.com. Submit a request today to be matched with the best 3-5 agents in your local market.