Making sure your credit is in good shape is one of the most important items on your checklist to homeownership. Your credit score determines whether you’re approved for a home loan, as well as how big that loan may be. Having a good credit score also means having more credit line options available to you.
Experian, Equifax and TransUnion are the three major credit monitoring companies that determine your score. While the exact algorithms used to calculate that magic number are complex, plenty is still known about what causes your score to raise or lower.
Whether you’re working on improving your credit or simply monitoring it, these 6 factors all play a role in determining your score.
Payment History
Paying bills, credit cards, and loans on time is paramount to maintaining good credit- so much so that it comprises 35% of your credit score. One late payment won’t cause your score to plummet, however the greater amount of late payments you have- and the longer you take to make the payments - the more negatively your score is affected. Making on-time payments shows lenders that you’re able to be trustworthy enough to loan money to because you’ll pay it back in a timely manner.
Amounts Owed /Debt to Credit Ratio
This is the second-most important credit-affecting factor. While on your credit improvement journey, maintaining a low debt to credit ratio will positively affect your score. No matter how much credit you have extended to you, keeping your balances low will always work in your favor. Conversely, having maxed out credit cards will have an adverse inpact on your credit score.
Length of Credit History
Your oldest account and the amount of time you’ve been using credit both factor into your credit score as well. This means that simply having a credit card open in your name (while not running the balance up or making late payments), will have a positive effect on your scores.
Types of Credit in Use
Many individuals aren’t aware that there are multiple types of credit, all of which can factor into your score differently. The three general categories of credit accounts are: revolving, open and installment. Revolving accounts require a monthly payment (i.e. credit cards). Open accounts have a balance that is to be paid in full each month (i.e. cell phone bills, utilities, etc). Installments accounts include any loans that show up on your credit report (i.e. car loans, student loans, business loans, mortgage loans, etc). The key here is to maintain a balance of revolving and installment accounts, as they demonstrate responsibility and credit experience.
Companies Pulling Your Credit Report (Hard Inquiries)
There are two types of inquiries that a third party can enlist to check your credit report- hard and soft- but only hard inquiries can have a negative impact on your score. Hard inquiries usually occur when larger lending decisions are being made and are pulled by major financial institutions, like when applying for a loan or mortgage.
Private or Government Liens
No matter how great or small the amount, having a lien on your property will negatively impact your credit. Your credit score will not begin to improve until the lien is paid off, however, if the lien isn’t imposed by the state or federal government, you can petition to credit bureaus to have it removed.
There are many factors that play into your credit score, but knowing what they are and how they affect you can make your path to homeownership that much easier to travel.
