credit-score

Whether it’s our age, our weight, our IQ score or even brownie points, it seems as if we’re always being judged by a number. While these numbers are important to some degree, there is one three-digit number that is especially important—your credit score.

Your credit score has a significant impact on your ability to qualify for a mortgage loan and even determines what your interest rate will be. The higher your credit score, the lower your interest rate. Because credit scores directly influence interest rates, increasing your score could save you thousands of dollars over the life of your mortgage loan.

Just as you would improve your weight by exercising more and eating better, there are also things you can do to improve your credit score. However, in order to raise your credit score, it’s important to understand how your score is determined.

Credit scores were primarily designed to provide lenders with a snapshot of a potential borrower’s financial history. Overall, credit scores help lenders determine a borrower’s ability to repay a loan and the amount of risk associated with lending them money.

The three credit reporting agencies, Equifax, Experian and TransUnion, use five main factors of the credit scoring system to determine your credit score: payment history, outstanding credit balances, length of credit history, type of credit and credit inquires.

Payment History (35%)

Payment history is the most important factor and accounts for 35% of your credit score under the credit scoring system. If you have established a consistent track record of paying your bills on time, lenders will look upon you favorably. If you have a tendency to pay your bills late, it’s important to make any missed payments and work hard to stay current on your account. The goal is to prove that you can be trusted to pay back your outstanding debt and make payments in a timely manner.

Level of Debt (30%)

The second biggest factor is your overall level of debt. How much of your available credit do you use on a monthly basis? A good rule of thumb is to keep your current balance less than 50% of your total available credit limit. Lenders will view you as a risky borrower if you max out your credit limit on a regular basis. For this reason, it’s important to keep your balances low and focus on paying off your debt instead of restructuring it.

Length of Credit History (15%)

The length of your credit history will also effect your credit score. The longer you’ve had your accounts, the better. A long credit history with no late payments will help prove that you are financially responsible.

Even if you have a credit card account that you don’t use often, don’t close it; this will lower your average account age. Opening new accounts will also lower your average account age. If you’re just starting to establish your credit history, don’t open a bunch of credit cards at the same time; you want to responsibly build your credit over time.

Type of Credit (10%)

The type of credit on your report has a 10% weight on your score. Just like having a diversified stock portfolio is important, having a diversified credit portfolio is important, too. A diversified credit report will contain a mix of revolving credit, such as credit cards, and installment loans such as student loans and car loans. This demonstrates that you are capable of managing a wide variety of debt.

Inquiries (10%)

Credit inquiries are factored over a six-month period of time and can also have a negative effect on your credit score. If a lender sees that you have multiple inquiries on your report, it will raise a red flag and signal that you may be opening other lines of credit. Don’t open new accounts if you don’t need to, especially before applying for a mortgage loan.

Finally, credit reports can contain a lot of errors. It’s important to monitor your credit by using a credit monitoring service like www.annualcreditreport.com and report any errors you find, such as late payments that aren’t late and even credit accounts that aren’t yours.

If you follow these simple steps, you’ll be well on your way to improving your credit score and qualifying for a mortgage loan with a low interest rate.

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Danielle Boote

Danielle Boote is a branch manager at Ross Mortgage Corporation and a Platinum producer with more than 25 years of experience in mortgage lending. She is a graduate of Cleary University and is a resident of Hamburg Township with her husband and four children. In her free time, Danielle enjoys boating, biking, spending with her family and traveling.

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