One important factor in home ownership is understanding things like your credit score. Some people don’t pay much attention to this metric until they begin the mortgage discussion! However, you will find that your credit score is one of the most important factors when qualifying for a mortgage at the best rate and with the most purchasing power.
Credit scores range from 300 to 900; the higher your credit score, the better. Ideally, you should aim for a credit score of 680 for at least one borrower (or guarantor), especially if you are putting under 20% down. If you can make a larger down payment of 20% or more, then a score of 680 is not required.
This score is based on spending habits and behaviors, including:
- Previous payment history and track record of paying your credit accounts on time is the number one thing that your credit score considers.
- Your current level of debt and whether you’re maxed or not is the second most crucial factor.
- How long you have had your credit in good standing is the third most important factor.
- Attaining new credits is the fourth factor and can be a red flag if you quickly open several credit cards, accounts, or loans.
- Your credit mix is the final aspect of your credit score to determine whether you have a healthy mix of credit cards, loans, lines of credit, etc.
If you want to improve your credit score, you can! It is a gradual process, but it is well worth it. Here are some tips to help you get started!
- Pay Your Bills: This seems pretty straightforward, but it is more complex. You not only have to pay the bills, but you have to do so in full AND on time whenever possible. Paying bills on time is one of the critical behaviors lenders and creditors look for when granting you a loan or mortgage. If you cannot afford the total amount, a good tip is to pay at least the minimum required on your monthly statement to prevent any flags on your account.
- Pay Your Debts: Whether you have credit card debt, a car loan, a line of credit, or a mortgage, the goal should be to pay your debt off as quickly as possible. To make the most impact, start by paying the lowest debt items first, then work towards the more significant amounts. By removing the low-debt items, you also remove the interest payments on those loans which frees up money that can be put towards paying off more significant items.
- Stay Within Your Limit: This is key to managing debt and maintaining a good credit score. Using only some of your available credit is advised. Your goal should be to use 70% or less of your available credit. For instance, if you have a limit of $1000 on your credit card, you should always stay under $700. NOTE: If you need more credit, it is better to increase the limit rather than utilize more than 70% of what is available each month.
- Credit and Loan Application Management: Reduce the number of credit card or loan applications you submit. When you submit too many credit card applications, your credit score will go down, and multiple applications in a short period can do more damage. You’re best to apply for one or two cards and wait to see if you are accepted before attempting further applications.
If you have questions about your credit score, please get in touch with me today! Whether you want to check your score or find out how to improve it, my door is always open.