Low or bad credit are one of the biggest hurdles that potential homebuyers face. Qualifying and securing a home loan is an obvious vital step in the home buying process, but most mortgage lenders require a minimum of a 620 FICO score in order to be approved for a home loan.
Understanding Your Credit Score
Understanding the categories that make up your credit score can help you know the right moves to make when trying to improve your score. The general breakdown for your FICO credit score is as follows:
35% Payment History
The first thing lenders want to know is whether or not your payments have been made on time. This is why it is one of the most important factors in your FICO score. A few late payments and you’ll see your credit score really start to tank. Other factors in your credit score can outweigh one or two late payments. Just as having no late payments doesn’t necessarily mean you’re going to have high credit score.
Ways to Improve Your Payment History
The past is the past, but that doesn’t mean you can’t improve this portion. Over time making payments on time will naturally improve your, but also making payments early can help. Creditors have report dates for when they send their information to credit bureaus, but if you pay your balance before you receive your bill and prior to it’s due date, higher balances will not be reported.
30% Amounts Owed
Read into this one very carefully, as owing money on credit accounts doesn’t necessarily mean you’re a high-risk borrower. It is when a high percentage of a person’s available credit is used. This instance could indicate that a person is overextended, and perhaps more likely to miss payments.
How to Improve Amounts Owed
This one gets complicated as there are many different types of credit out there. When you still owe a significant amount on an installment loan (such as a loan for a vehicle), that doesn’t necessarily mean you’re at high risk as long as you’re making your payments on time. However, if you have several credit cards with high balances or are all close to their limits, that will affect your score in this area. To improve this area, continue to pay installment loans on time and pay down your credit card debt next.
15% Length of Credit History
This portion of your credit score is relatively self explanatory and unfortunately, not a whole lot you can do to improve this portion quickly. In general, a longer credit history will increase your credit score. However, that doesn’t mean that just because you haven’t been using credit for a long time you can’t have a high credit score.
10% Credit Mix
Your credit score is based on the complexity of your credit accounts. It will consider, credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Having all or some of these types of accounts can improve your credit score as long as they have been managed and paid for properly. Depending on your credit history, your credit score will consider the total number of accounts you have. Having too much credit can put a potential borrower at risk. Manage your cards responsibility and avoid opening too many new lines of credit in a short period of time.
10% New Credit
More frequently than ever, consumers are shopping for new credit. However, opening several new credit accounts in a short period of time is a red flag to your credit report as it represents greater risk. Your FICO score will take into consideration how many new accounts you have by the type of account and how rapidly they we all opened. A diverse credit portfolio is beneficial when done over time and managed closely.