If you’re shopping for a home, you know that they don’t always come cheap. Unless you’re one of the lucky few who stumbled across a hoard of treasure or won the lottery and can pay with cash, you’re likely going to need to secure a loan in order to finance your home purchase. Lenders will always look at your credit score to see how well you manage debt.
Below are a few things to keep in mind regarding credit scores.
Credit reports are used to calculate your credit score. Equifax, Transunion and Experian issue credit reports. The reports calculate your credit score regardless of whether or not the information on the report is correct. Additionally, you won’t always know which report was used to calculate your score. So it’s crucial you keep an eye on all three reporting agencies and report fraud or mistakes as soon as possible.
You can visit this site to obtain a free report from each of the above credit bureaus once a year. Any errors or identity theft on a report will need to be reported to the issuing credit bureau.
Know Its Impacts
There are five categories within credit reports that affect your credit score. (Impact percentages are approximate.)
- Payment History: Paying your bills on time and avoiding late payments, charge-offs and collections will positively impact this section.
Score Impact: 35%
- Amounts Owed: How much money do you currently owe on credit cards, car, home or student loans? Keeping your credit card debts low or paid for will impact this category the most.
Score Impact: 30%
- Credit History: This section looks at how long you’ve had credit based on the open dates of your credit lines. The longer you’ve had credit, the better you’ll do here.
Score Impact: 15%
- Types of Credit: A balance of different types of accounts will help better your score. Think different credit cards, auto loans, home loans, etc.
Score Impact: 10%
- New Credit Searches: Applying for a new line of credit shows you’re seeking credit, which counts as a positive. However, having too many inquiries in a short period of time negatively impacts your score. Essentially, don’t shop around excessively. Apply for credit when you’re going to be using it. Inquiries stay on your credit report for two years, but only inquiries made in the last 12 months will impact your score.
Score Impact: 10%
So what is a “good credit score?” If you’re scoring 700 or higher, you’re in great standing. Sinking fewer than 600? You’ll want to make some changes.
Credit scores aren’t permanent, nor do they have to take decades to change. Positive and negative changes can be made quickly. If you’ve had a bad history with credit, you can rebuild your credit.
Rebuilding your credit could mean asking for forgiveness from credit card companies if you’ve made some late payments but have an otherwise solid, loyal history. Paying down your credit card and other debts more quickly could also help improve your credit score. Try to use less than 30 percent of your credit card limits at a time.
If you have a lower score but don’t have much credit history, your score is likely due to that lack of history. In this case, it’s just a matter of patience and keeping a strong payment track record.