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August 28, 2013
Everyone knows the importance of a good credit score, even if you don’t know what your credit score is. More unknown is how lenders calculate a credit score. The most prominent method emerged in the early 1980s by the Fair Isaac Corporation in conjunction with three large credit companies. Over the years investors have learned which factors determine a credit score, and understanding the process matters, since it can help you increase yours. We’ve compiled a breakdown of what factors into determining your credit score—and how much, so you can work to make yours the best it can be.

Payment History: 35%

Your payment history has the largest effect on your credit score, and it makes sense why. Lenders want to ensure you have a good history of making payments, and making them on time. Frequent late payments and/or payments that were sent to collection factor negatively on your score. The longer the amount of time since an incident has passed, though, the less effect it has, so don’t worry too much if something occurred many years ago.

Outstanding Debt: 30%

Lenders want to make sure you aren’t already overloaded with debts, whether from school or car loans or credit card debt. If you have credit cards, it can help your score, but cards at their credit limit will reflect poorly on your ability to take on additional debt.

Length of Credit: 15%

How long you’ve been borrowing and building credit is another important factor. The longer history you have of making payments and handling loans, the better you as a candidate look in the eyes of a lender.

New Credit: 10%

Lenders prefer to see that you have stable, long-term sources of credit. Most loans, especially home mortgages, depend on decades of regular payments from borrowers. Opening and closing credit cards constantly, even if you’ve never defaulted on a payment, doesn’t signify an ideal candidate for a new loan.

Credit Diversity: 10%

Having credit experience of more than one type also affects your overall score, though not as dramatically as other factors. Lenders like to see that you can manage more than one type of loan or debt, so diversifying your credit history can help your score.

We at First Option want to help you obtain a great mortgage, and having a strong credit score can ensure you receive one of the best mortgages available. We’re happy to assist you to purchaserefinance, or learn more about mortgage rates. Simply fill out our Fast Response form or give us a call at 855-300-4339.

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