What Affects Your Credit Score
Where to begin! To preface the below blog I am not a credit professional nor am I in credit repair, however, I do look at credit reports all day long.
It is NEVER too soon to better understand what exactly goes into that omnipotent credit score. There are hundreds of different credit scoring models. For example, you likely have seen your score on Credit Karma® or perhaps your banking institution offers a credit monitoring service, both of which provide consumer copies of your score. While this is a great way to track trends in your score, the mortgage FICO® scoring model is likely going to show you something a bit different.
There are five components that most greatly impact your credit score:
Payment History (35%)
Paying your debt obligations on time is the most important practice you can follow. Just one late payment can have a large effect on your score. Utilize auto payments when possible and if a late does occur, try calling the creditor to ask for it to be removed. While this isn't required that they do so, it never hurts to ask. Derogatory events such as collections, late payments, and charge-off's also fall into this bucket.
Amounts Owed (30%)
Revolving accounts, such as credit cards, can hurt your score if the balances are high compared to the account's high credit limits. As a general rule, try keeping your balances at or below 27% of the account's high credit limit to help boost your score. When a card's balance is above that, or espeically if the card's balance is maxed out, that can have a large negative impact to your score.
Credit History (15%)
The credit bureaus react more favorably when accounts have been open for a longer period of time. The sweet spot is usually three or more years. Without a long credit history, the credit bureaus do not have enough to judge you on. The long history of responsible usage will help build your score more and more. This means, even if you are not thinking of purchasing a home in the near future, make sure you have, ideally, 2 - 3 open tradelines that you are using responsibly. The sooner you start building your credit, the better.
Types of Credit (10%)
Having diverse tradelines will help your score as well. For example, having a mortgage, a car loan, and a credit card will be viewed more favorably by the credit bureaus than if you only had three credit cards.
New Credit (10%)
Similar to the above, new credit will likely hurt your score yet since you haven't yet proven to the credit bureaus that you can handle this new debt responsibility. Each month that goes by with that new debt, the more your score should improve. When you are pre-qualified and out house hunting make sure not to open up any new debt! Not only does it impact how much you qualify for, but it can also cause your score to drop.
The best place to start is for us to review your personal report together. Please reach out so we can discuss further.