My Credit Score
Credit scoring has an enormous impact on your ability to purchase a home. It can mean the difference between getting a good interest rate and the home of your dreams, or whether you even qualify at all. For this reason, it is important to understand the credit scoring process, and to know what a credit score is when you look to obtain home financing.
The following is a basic overview of the most important factors in determining your credit score (AKA FICO score). Keep in mind that the three major credit bureau (Equifax, Transunion, Experian) all calculate their scoring models slightly differently, so what’s presented here is a slightly blended overview of the relative weight in the credit scoring process.
Payment History – 35%
Payment history accounts for about 35 percent of your credit score. It makes sense that this would be a top factor, since someone with a long history of never missing a payment is likely to continue to be a safe person to lend money to.
If you do have negative marks on your credit score, three factors will determine the size of the deduction to your credit score:
1. Time Since The Event – how long ago did you miss a payment? If it was a long time ago, and you have a good payment history since that time, it will not affect your score very much. Whereas a recent missed payment will cost more against your credit scoring.
2. Number of Missed Payments – obviously matters. One missed payment in ten years of good history won’t matter very much, but the more missed payments in your history, the more risky you are seen to be and this will be reflected in a lower debt score.
3. How Bad was it? – being late or missing one credit card payment is a small deduction. However, having a bill go to a collection agency, even for a small amount, could amount to a sizable deduction to your score.
Credit balances – 30%
This factor marks the ratio between the outstanding balance and available credit. Ideally, you should make an effort to keep balances as close to zero as possible, and definitely below 25% of the available credit limit when trying to purchase a home.
Length of Credit History– 15%
This accounts for about 15% of your credit score, with favorable weight going to those who have had credit for the longest time. The reasoning behind using time as a credit score factor is because in time it is easier to establish patterns of behavior.
The Types of Credit – 10%
In short there are two major types of credit: revolving and installment debt. Car loans and mortgages are examples of Installment debt. Revolving debt relates to credit cards and department store cards. Generally credit cards are seen as higher quality revolving credit, than department store cards. And mortgages are seen has higher quality than revolving credit, simply because they are more difficult to obtain.
The type of credit you are using represents about 10% of your score, and a higher score is give to people with a blend of credit from various sources. This is seen as a reflection of trust, due to each credit card or loan being seen as an endorsement from a different company.
Conclusion: Building and maintaining a good credit history (and score) is important to all of us, since credit scores determine the rate of interest we will pay on consumer items, such as: home loans, credit cards and insurance premiums. The good news is that every American United Lending Professionals is skilled at evaluating credit reports, and can guide you on how to improve your score in the near future in order to obtain the best loan possible.