Mastering Your Credit Score
Everyone knows credit score is an important aspect when getting approved to take on any type of debt. This means home buyers using financing will need a good credit score to get approved. Many people are unsure how their credit score is calculated and how they can easily build credit to meet lenders' standards. In this week's newsletter, I will address these topics to ensure you obtain the score you need to buy your dream home.
FICO scores, while not the only type of credit score, are the most common. FICO scores are calculated based on five factors: payment history, the amount owed, length of credit history, new credit, and credit mix.
Payment history- Payment history accounts for 35% of your credit score and considers whether you have paid your credits consistently and on time. They want to see how long overdue your payments are and the number of times that past-due items appear in your credit history. They will also consider financial issues like bankruptcy, collections, and delinquencies and how recent they were.
Amount owed- The amount owed accounts for 30% of your credit score and considers the debt you owe. One way for them to calculate this is through credit utilization ratios to see how much you owe vs. how much credit you have available. For example, if you have up to 10,000 dollars in credit but only 2,000 dollars of debt, your credit utilization would be 20%. The lower the credit utilization, the better.
Length of credit history- The length of credit history accounts for 15% of your credit score. The longer your credit accounts have been open, the higher your score will be. The reason is those with longer credit history have a longer proven track record than someone with a lower credit history, meaning they will be less risky from their point of view.
New credit- New credit makes up 10% of your score. Individuals constantly opening new credit accounts could be showing financial distress in the eyes of the lender. Always consider whether you need the credit when opening a new credit account.
Credit mix- Credit mix makes up 10% of a FICO credit score. Credit mix symbolizes the individual’s ability to manage different types of credit. A healthy credit mix shows successful management of different types of credit. These lines of credit can be revolving credit and installment credit. They like it when both are represented, if possible.
Now that you know how a credit score is calculated, hopefully, it is easier to keep your credit score up. Lenders want to see that their borrowers will pay them back, and to cover their risk, they put these metrics in place. If you are trying to build your credit, it is recommended to limit your credit utilization to as little as possible and pay your debts on time. In addition, if you do not need more credit, hold off until your score is high enough to handle a slight decrease due to recent inquiries.
If you have any more questions or want to discuss this topic, reply to this email.
Kyle Camerlinck
Taiter Realty
