A high credit score can help you qualify for lower mortgage interest rates, so it is important to know what affects your score. Credit scores are calculated based on information from one or more of the three major credit bureaus: Experian, Equifax, and TransUnion. Lenders also often use scores from the Fair Isaac Corporation, or FICO.
Credit bureaus don't consider other factors, such as your salary, your bank account balances, and any payments that are fewer than 30 days late. However, your lender will use this data along with your credit score to decide both what mortgage rate and what amount of mortgage you will qualify for. So what affects your score? Possibly some things you haven’t thought about other than making late payments. Your payment history makes up about 35% of your score, so you should avoid paying bills late whenever possible. Missing one payment generally won’t impact your score much, but missing multiple payments could make qualifying for a good mortgage rate difficult. Establishing a good payment history for loans, utility bills and credit card bills will show creditors that you're reliable and responsible.
The amount of your available credit that you're using accounts for about 30% of your credit score. To achieve the best score, you should use less than 10% of your available credit. If you need to use more, try to keep it under that 30% threshold. For example, if you have no loans (lucky you) and you have a credit card with a $5,000 limit, you should keep your card balance under $500 to make sure your credit utilization stays under 10%. Applying for another credit card will increase your available credit and make it easier to keep your credit utilization low. It sounds counterintuitive sometimes to say “you need to open another credit card account” but this is the reason behind the advice.
The average age of your credit accounts makes up about 15% of your total score. Applying for several new accounts in a short time can temporarily lower your credit score, as the accounts will all be without a payment history. Older people and those who applied for credit at an earlier age usually have higher scores, as they have a longer credit history. Having a good mix of accounts makes up about 10% of your total credit score. People with the best credit scores have both credit cards and installment loans, such as a mortgage or a car loan, rather than just credit cards. Utility bills can also be part of the credit mix.
When you apply for credit, the lender makes an inquiry about your credit report. The number of inquiries on your account makes up about 10% of your credit score, and too many in a short period can lower your score. While only inquiries from the previous 12 months will impact your credit, several inquiries from various mortgage lenders within a short period of time will be treated as if they were just a single inquiry, and thus will have very little impact on your credit score. And checking your own credit report won't change your credit score, so check away and keep track of the progress you’re making in raising your score!
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