Maintaining a strong credit score is one of the most important things potential buyers can do if they want to qualify for a mortgage, since credit scores are used by lenders to measure financial health. A recent study showed that 34 percent of potential buyers believe their current score will hurt their future ability to purchase a home.
So how do they calculate the three digits that determine if you can purchase a home?
Your payment history is undoubtedly the most important factor of maintaining good credit. It comprises roughly 35% of the credit scores whole. The payment history on a credit card and installment loans is something that the borrower has complete control over. If you consistently make your payments on time and pay at least the minimum payment you should never have an issue. You should be aware that even having a few late payments could skew your credit score negatively.
The debt category is broken down into credit card debt and installment loan debt. Your debt owed on a credit card is different than an installment loan such as a car or student loan. Credit card debt is examined by a debt to total credit. If you have a credit line of $10,000 on your credit card you don’t want to max it out unless you have enough cash laying around to pay that off at the end of the month or billing cycle. Instead, only use 10-20% of the total credit limit and make sure to pay it off on time so you don’t accrue interest charges.
Installment loans differ from credit cards but they are just as important to pay down. This is money you have already borrowed and will continue to amass interest. Making your monthly payments on these on time is very important because these installment loans tend to be higher than credit card debt and generally will be paid over a longer term.
Length of History
Starting to establish GOOD credit from a young age is important. It’s good to start building credit as a young adult so that in the future this person will be able to obtain credit if desired. A low risk suggestion for young adults in high school or college is to start building their credit is to get a low limit credit card around $300-$500. This can teach them responsibility and they can grasp how credit works. Another suggestion, if possible, is to have them cosign on an installment loan such as a car.
Simplicity is the key. You don’t need 27 different credit cards to establish good credit. Every time you try and apply for credit it can ding your score a couple points and this ding on your credit may stay until 6 months to a year. In fact, the more inquires you make on obtaining credit the worse it is. Too many inquiries on your credit report sends signals to lenders that you might not be the most responsible when it comes to your finances because you are attempting multiple times to get additional credit for funds. If they don’t feel the borrower is responsible enough with their finances they may deny the request for credit. If you’re concerned about inquires on your credit visit the credit report Q & A on myfico.com for articles that can help you decipher what inquiries are bad or good.
Mix/Types of Credit
Having a vast mix or different types of credit on your history only comprises about 10% of the whole but it still is something that gets looked at by lenders. Again, you don’t need a large quantity of credit cards or loans to meet these criteria. If you have a few credit cards and possibly a few installment loans this will show the lender you have financial responsibility across various platforms.
Source: New American Funding