When you’re in the process of getting a mortgage, or any type of loan, a lender will evaluate your ability to pay back the loan by looking at a variety of factors. Two important factors that they will review are your debt-to-income ratio and your credit score. A credit score is a number that is used to track your history of paying debts. Credit scores can range from 300 – 850 and they are tracked by 3 main credit bureaus: TransUnion, Experian, and Equifax.
When a lender pulls your credit score, they will generally obtain reports from all three of these bureaus. Your score may differ slightly between the 3 bureaus, and when a lender pulls your scores they will usually use the median number between the three as your score to determine credit worthiness. A higher credit score can help you qualify for a wider variety of loan products, and even better terms and interest rates on your loan.
To keep your score strong, you’ll want to pay attention to these 5 factors!
Lenders want to see that you are able to meet the terms of your loan agreement with on-time payments, and they will look at your past account history for evidence. Your payment history is one of the most heavily weighted factors in determining your credit score. If you regularly make on-time payments on your credit card and other loan accounts, you will see a positive effect on your credit score. Alternatively, if you miss a payment or make a late payment, you will likely see a decrease in your score. If possible, it is best to pay the full amount that you spend on your credit card each month. This will help you avoid interest charges, and will also keep your score high.
The amount that you use your credit is also an important factor that creditors use to determine your score. If you use too much of your credit limit, your spending could be seen as irresponsible. However, you do want to use enough of your credit to show that you can responsibly borrow and pay back money. According to www.creditsesame.com, spending between 5-7% of your credit limit is a good range to show lenders and creditors that you are responsible.
Length of Credit History
This factor is slightly less impactful on your overall score than Payment History and Credit Usage, but it still has a fairly significant influence. The longer that you have credit accounts open in your name, the better. Credit companies like to not only see that you can make on-time payments, but that you have a long history of doing so. Your length of credit history is measured as an average of all of your open credit accounts. This is why it can be a good idea to keep older accounts open to cause your average length of credit history up. It is also a good idea to avoid opening any new credit accounts within a year of applying for a mortgage. In general, having at least 3 years of average credit history can help your score stay up – it is best for your score if you have over 5 years.
Multiple Types of Credit
Another factor to your credit score is diversity your credit accounts. If you have a proven history of paying back a variety of different loans, you will be seen as someone who can responsibly handle debt. If you only have one type of account, like a credit card, there may not be enough data available to draw conclusions about your debt management skills. Having multiple types of credit accounts in your credit history, like credit cards, an auto loan, and even student loans can show your ability to manage debt appropriately and help your score rise. Of course, it is important that you make on-time payments on these accounts to ensure that the impact on your score is positive.
Number of Inquiries
Finally, the number of credit inquiries on your account can have an impact on your score. A credit inquiry is when a lender pulls your credit report to evaluate your score and determine if you are eligible for a loan. If too many of these inquiries happen within a time frame, it can be seen as a red flag. Many lenders will start by doing a “soft” credit inquiry to provide a pre-approval. Soft credit inquiries will not affect your score, and can allow you to compare different lenders before making a decision. This factor is another reason that it is best to avoid applying for any new credit within the year that you plan to apply for a mortgage.