How your credit score is determined
Your credit score is determined by a number of factors, including how much debt you owe, your payment history, the length of your credit history, the mix of credit you have available, and any new credit you have. Payment history and the amount you owe are usually considered a bit more important than other factors, each weighted at 35 and 30 percent, respectively. However, it’s also worth noting that the exact nature of what goes into your credit score is not known to most people. The credit score your lender will be examining is also known as a FICO score which is a proprietary tool maintained by a data analytics company called the Fair Isaac Corporation, or FICO. Because it’s proprietary, we unfortunately don’t know FICO’s exact formula.
What a good credit score can do for you
Your credit score greatly improves your access to liquidity in a variety of areas, from car loans to credit cards to mortgages. Credit can determine how much you can borrow. For instance, your credit score can determine what maximum limit you can have on a credit card.
Home loans are a little different, though. When you take out a mortgage, your credit score can affect the size of the loan you take out, and the interest rate that you can get. Specifically, if your credit score is below 700, it can greatly affect what kind of rate you get. One economist found that if your credit is below 700, even a gain of 25 points in your credit score can affect your mortgage rate. However, the same economist found that if homebuyers have a score above 700, things get more complicated. At that level, lenders usually look to other factors such as income, assets, and the size of the down payment you can put down.
How to improve your credit score
Improving your credit score is fairly simple; though “simple” does not always mean “easy.” Paying bills on time and paying down debt are two major factors that will increase your credit score. Also, be sure to not max out your credit lines. If you can keep credit cards active, but use less than 30 percent of the available credit, that will go a long way toward improving your score.
Lastly, if you have a low credit score, don’t worry. It is possible to work with a lender to figure something out, and get a mortgage that’s right for you. There are many types of mortgages out there, and a good lender can help you find yours.