When applying for a mortgage loan, your credit score will be one of the key factors in whether you’re approved and it will help determine your interest rate and possibly the terms of your loan. It’s a good idea to get a free copy of your credit report from annualcreditreport.com before you begin the home buying experience.
Here is what your credit score (also referred to as your FICO score) is made of:
Payment History: 35%
Your payment history carries the most weight in your credit score. Your history includes which of your accounts were paid on time, the amounts owed and the length of any delinquencies. Also included are any adverse public records such as bankruptcies, judgments or liens.
Credit Utilization: 30%
This data includes the number of accounts you owe money on, the type of debt and its total amount. Also included is the ratio of money owed to credit available, often referred to as a credit utilization rate.
Length of Credit History: 15%
Your length of credit history factor includes the length of time your accounts have been open and how long it has been since they have been active. Showing creditors your ability to repay debt over a length of time shows a positive reflection on your credit score.
Types of Credit in Use: 10%
The types of credit used comprise another 10% of the credit derived scores. Pay off revolving debt and pay as requested for other loans.
New Credit Applications: 10%
Opening up too many accounts in short of a period of time is interpreted as risk and will lower your score. Remember, the longer the relationships with the same creditors, the better the score.