So, sure, you know that everyone has a credit score. But what is yours? And what impacts your credit score? Your score can range from 350 to 850 and is entirely dependent on your past financial decisions. If you are considering buying a home, your credit score is incredibly important.
These Five Things Impact Your Credit Score:
Payment History (35%)
Lenders want to know that they will get their money back. If your credit history, or credit report, shows that you make payments on time (and have paid off some big purchases) then your lender will be pretty happy.
The later you are at paying things back, the worse it is for your credit score. If you’ve been so late on payments that your home has gone into foreclosure, then that’s a massive red flag for lenders. If you didn’t pay back a loan in the past, why would you pay it back now? There are three major credit reporting agencies: Equifax, Experian, and TransUnion. Every 12 months, you are entitled to order a free copy of your credit report from each of the them
Current Debts (30%)
Okay, sure you have a pretty good payment history, but how will the added debt of this loan change that? If the monthly payments on this loan are a lot compared to your income, the lender could be worried. You can do a little at-home evaluation of your current debts by looking at your debt to income ratio.
Credit History (15%)
Have you spent the last 35 years establishing solid credit? Or did you just open up your first credit card last week? A bank wants to see your credit history so they can be sure that you actually know what you’re doing.
New Credit (10%)
Did you just apply for a credit card? This will bring down your credit score for a short period of time (even if you didn’t end up getting the card). Why? Well, if you’ve opened up a few new accounts, you’re a greater risk. Your current debts could change any minute. Changing current debts could mess up your payment history and a lender doesn’t want to deal with anything risky.
Types of Current Credit (10%)
Lenders like to see that you can successfully manage different types of credit. Can you pay off student loans, while also paying for your car loan and monthly credit card? If you’re able to manage paying off different types of debts, you’re more prepared to pay off a new debt. That being said, don’t open up just to mix up your types of credit. It’s important, but it’s not that important.
Your credit score is important for a number of reasons, but it’s particularly important when trying to get a loan to buy a home. Most loan providers judge your credit score based upon one generated by FICO.
One of the biggest loans you’ll probably ever get is a mortgage. Your credit score impacts the interest rate you’ll pay on your mortgage. Or, in some cases, whether or not a bank will even give you a mortgage.
Need some help buying a home?
Brady Miller, CFA is Chief Executive Officer at Trelora, Inc. Brady joined Trelora in August, 2018 as Chief Financial Officer. He moved into his current role later that year and is responsible for all daily operations and growth of the broader real estate business. Prior to joining Trelora, Brady was Chief Financial Officer of Leeds West Groups which is one of the largest, and fastest growing automotive retailers in America. Brady managed their real estate portfolio, financing, human resources, and accounting. He earned a Charted from the CFA Institute in 2016 and holds a bachelor’s degree from the University of Colorado, Boulder where he majored in Finance and Real Estate.