As with everything else, when buying a new home, knowledge is power. The more knowledge you have, the easier the process of buying a new home will be. So get over your fears and start to understand this process. Here we’re going to help you understand your credit score and how to increase it.
These are the companies that can make or break your chances of getting a mortgage, because lenders look to them to determine your credit worthiness. The major credit bureaus are Experian, Transunion, and Equifax, and the information they provide to lenders makes up your FICO score. Not all lenders pull information from the same credit bureaus, so it’s best to know what your credit score is from each of them.
What does a credit score mean? It’s a number between 300 and 850 that is based on your credit history. And when it comes to qualifying for a mortgage, your credit score means everything. Not only will it determine if you will get a loan, but will also play a role in what kind of interest rate you will be paying. It’s easy to find out your credit score. Lots of banks offer this service to their customers free of charge. There are also many sites on the internet that will provide you your credit score for free.
What can affect your credit?
There are many factors that can positively or negatively impact your credit, such as debt-to-income ratio, payment history, how long you’ve had credit, the types of credit you have, your credit limits and how much of those limits you’re using, and hard inquiries on your credit report. Sound like a lot to learn about? Don’t worry, we’re going to break them down for you here.
Debt-to-income ratio and credit limits
Your debt-to-income ratio is determined by how much of your monthly income goes to paying debts. Lenders will worry if they think you are over-extending yourself. So they look at this ratio closely, especially because your mortgage payment should be no more than 20-25% of your income. Same goes for your credit limits. Lenders will look at how much of your credit limits you are using, as this can also be an indicator that you may be over-extending yourself.
Payment history and how long you’ve had credit
Your payment history is the single most important factor that determines your credit score. It is essential to pay your bills on time. Even one payment that is overdue by 31 days can lower your score by over 100 points. The longer you’ve had credit, the easier it is for lenders to determine if you pay your bills on time.
Types of credit you have
Lenders look at what types of credit you have, whether it’s credit cards, auto loans, student loans, or mortgages, and how faithfully you pay these debts. So you’ve been late a time or two in paying your credit card bill or student loan? Probably not too big of a deal. But if you’ve been late paying your car note or mortgage payment, even once, that’s a whole different story.
Hard inquiries on your credit report
Every time a creditor looks at your credit score to determine if they want to extend credit to you, it’s considered a hard inquiry and will lower your score by a few points. Soft inquiries, on the other hand, do not affect your credit score. Examples of soft inquiries are those made by charge card lenders (such as your Target card), or when you check your own credit.
The good news: you can increase your credit score
If all this talk about credit has your mind reeling, don’t worry. It’s not all doom and gloom, though it may feel that way. You do have control over your credit score. Obtain your FICO score and look for incorrect items, then file an appeal with the credit bureau that has the incorrect information, and have it removed. What is the single best way to improve your credit? Get yourself a Visa or Mastercard and pay the balance in full every month.
Back to the basics: knowledge is power
The more you know about your credit, the better your chances of obtaining a mortgage for that dream home you’ve wanted for so long. So arm yourself with everything we’ve taught you here, and go out and buy yourself a new home!