Understanding Your Credit Score
When it comes to buying a home, your credit score matters. Lenders use your credit score to determine what loan program and interest rate you qualify for. A credit score over 720 is considered good credit and a credit score between 750 - 800 is considered excellent credit.
What if your credit score is less than 720?
A credit score of 600 (varies by lending product) or higher can still qualify you for a home mortgage loan, but it may come at different terms than if you had a score of 720 or higher. Good and excellent credit can often get you better loan terms, but that doesn’t mean you can’t qualify for a loan with a lower score. Your Bryte Home Loan Team advisor can help you explore all of the options available for you with your current credit score.
What’s Your Score?
Your 3-digit credit score is a summary of your credit health. To come up with your score, credit reporting agencies — Equifax, Experian, and TransUnion — use a complex mathematical formula to analyze your credit behavior based on five main categories of data.
Payment History
One of the most important factors for your credit score is whether or not you have paid past accounts on time. A good track record of on-time payments will generally increase your credit score, where negative factors such as late payments, liens, judgments, foreclosures, or bankruptcies will generally decrease your credit score. Your payment history accounts for 35% of your overall score.
Amounts Owed
The percentage of your credit card limit that you have used is known as your credit card utilization (CCU). A good rule of thumb is to aim for a CCU of less than 30%. Both the CCU of individual accounts and your overall CCU of all accounts combined are considered. When it comes to credit card utilization, less is more. Your credit utilization accounts for 30% of your overall score.
Length of Credit History
The amount of time your credit accounts have been open impact your score. When it comes to improving credit history, it may be beneficial to leave a card open after you have paid it off, rather than closing it. When you close a credit account, it no longer applies towards your credit history. A longer credit history is better for improving credit scores. Your length of credit history accounts for 15% of your overall score.
Credit Inquiries
Opening up too many new credit accounts in a short period of time sends a red flag that you may be a risky borrower, and can damage your credit score. It’s okay to request and check your own credit, but multiple inquiries to open new accounts can be damaging. Credit inquiries stay on your credit report for two years, although they may only count against you for one year. Looking for a loan? Don’t worry. Shopping around for the best rate on a home loan won’t count against you either. Recent credit inquiries count for 10% of your overall score.
Credit Mix
A mix of credit cards, installment loans, retail accounts, and mortgage loans isn’t one of the most important factors for your credit score, but it is important if you don’t have a lot of other information to build a score. If your credit history is limited to only one type, such as retail accounts, it could result in a lower score than if you had a mix of credit types. Your credit mix accounts for 10% of your overall score.
Three Easy Steps to Improve Your Credit Score
1. Make Payments on Time
The biggest contributing factor to your credit score is a history of on-time payments. If you have a history of late payments, there is no better time to change this than now. Set up bill pay reminders for all of your open accounts, or consider signing up for automatic bill pay, where credit cards and loan payments are paid directly from your bank account.
2. Pay off Debt
When you pay down your debt, you increase your CCU percentage, and that will help increase your credit score. Paying more than the minimum payment on a revolving credit line will help you pay down your debt faster. And remember, closing down a card once it’s paid off will not necessarily be better for your score. If it’s a card with a long history of on-time payments, keeping that card open may be a better option.
3. Don’t Open Multiple Accounts too Quickly
New accounts will lower your cumulative credit age (length of credit history), and too many credit inquiries within a year will also lower your score. If you don’t need to open a new credit account, don’t.
Please visit our Disclosures page for more details for all loan types.