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Which Factors Impact Credit Scores?

Did you know there are five categories that impact credit scores? How they may affect your overall credit score can be crucial, especially when it comes time to purchase a new home or apply for a mortgage loan. Credit scores are more than just making payments on time. 

Whether you’re new to the world of credit cards, loans, and car payments or you’re a veteran in the game, understanding which factors are taken into consideration when calculating credit scores is the only way for you to effectively monitor and improve your own credit score. Even if you think you have a great credit rating, things can happen during life that impact credit scores without you noticing. From buying cars to qualifying for the home loan you need to buy a new house, understanding which factors impact credit scores can help you reach your goals more quickly. Let’s look at them.

1. Payment History:

Paying on time might seem like a simple idea, but since this category can impact your credit score significantly, it’s important to keep a close eye on due dates. Your payment history (whether you pay bills, loans, and credit card payments on time), usually makes up 35 percent of your total credit score. It’s also important to remember that payment history doesn’t just come from things like utilities, credit cards and car payments. Bankruptcies, liens and any type of bills sent to collections also affect this category.

When it comes to payment history, one small mistake or missed payment can affect your score. Keep this in mind if you’re planning to make a major purchase soon, such as buying a new home. Letting even a small payment go past due can lead to it being reported to the credit bureaus and, depending on where a credit score was when the home buying process started, this could lower your score low enough to disqualify mortgage loan approval or reduce the amount you’re qualified to borrow.

2. Credit Utilization:

Utilization of open credit lines weighs the second-most of all categories of a credit score at 30 percent. It’s not a bad thing to have multiple credit cards open and have a relatively small amount of debt, but the biggest thing to remember when managing credit card finances is to maintain a good ratio of available credit balance. The way the credit bureaus generally evaluate it is simple: the more credit card debt piled up, the more difficult it will be for payoff to happen quickly.

Not all revolving payments are weighted the same, either. Credit card lines are weighted more heavily than other revolving payments like student loans and car payments. Of course, all of these things contribute to a debt-to-income ratio when in the process of buying a new home, so knowing how to keep this in balance is important.

3. Length of Credit History:

This category usually accounts for about 15 percent of your credit score. What’s important is to know how many credit lines are open, how long they’ve been open for, and when more will need to be opened. For example, it could be beneficial for you to establish some lines of credit in order to build a strong credit score well in advance of making major purchases (such as buying a new house). If you have had multiple credit lines open for a while and you have a track record of making payments on time and paying off accounts regularly, it could be a good idea to continue to use them to build a strong credit history. What is usually not a good idea is opening one or more new credit lines just before or while you’re in the home buying process, as opening new credit lines may initially drop your score. Not only drop your score but kick you out of the range of score you need to qualify for certain loans. 

4. New Credit:

This category usually makes up about 10 percent of your overall credit score. It’s made up of the accounts that have been opened in the last 6-12 months, credit inquiries on a report, how long it’s been since accounts of any type were opened, how long it’s been since there were any credit inquiries, and the re-appearance of positive history for accounts that used to have negative aspects attached to it. How this category is scored depends on many factors. For example, if you have a strong, long credit history, you may not lose as many points for multiple credit inquiries in a short time as someone who has a shorter, less-strong history.

5. Credit Mix

Not only does it matter how much debt exists and how long it’s been there, but it also matters what kind of debt it is. Making up the last 10 percent of a typical credit score, maintaining a mix of different types of debt is important. When analyzing a credit score, see where the mix is when it comes to installment loans (student loans, car payments, etc.), mortgages, bank credit cards, retail credit cards, and even rental data. Having a good mix, instead of heavily weighing on any one type of debt, will often help improve your score.

I would be happy to speak with you about the factors that impact credit scores and suggest actions you can take that might improve your credit rating before you apply for a home loan. I also have a reputable credit repair partner to refer you to so you can be educated and ready for your new home! Give me a call for more information.

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