Each quarter we feature a mortgage lender answering some of the most commonly asked questions about purchasing and refinancing a home. If you would like to submit a question for this column, email email@example.com.
"What is a credit score, how does it affect my loan and how can I improve it?"
Elida Branch Manager
The first question I often hear, especially from first time home buyers is "What is a credit score, does it affect a loan decision, and how can I improve that score?". A credit score is a three digit number, which is calculated from your credit report and is one factor lenders use to determine your credit for a loan or credit card. This score can affect whether or not you are approved, and what interest rate you will be charged. A credit score can range from a low of 300 to the highest of 850. A credit score is important in the consideration on a loan, but is not the only factor in a loan decision. The top three credit bureaus in the United States are Equifax, Experian, and TransUnion.
There are five areas that calculate your credit score and the weight it affects the score.
- Payment History (35%)
- Amount Owed (30%)
- Length of Credit History (15%)
- Types of Credit Used (10%)
- New Credit (10%)
To improve your credit score make sure that you always make your monthly payment on time. Missing a payment or being late on even one payment can affect the score quickly. Also make sure the balances you have on your credit cards are lower than 30% of the credit limit. Carrying over the balances of the credit card on a monthly basis is dangerous to your score. Lenders look at the credit history to show the experience people have with loans. The longer you have the account the higher the score will be. If you do not use an account (credit cards) and want to cancel one, cancel one that was opened the most recent. Closing one that you had the longest, removes that history from your credit report.
Make sure you have a mix of credit on your credit report. A mix of credit shows experience of different account types. Sticking with one type of loan can hurt the credit score. Finally taking out too many new credits too quickly can hurt the credit score - this can also include the number of credit inquiries lenders use in the application process. New credits and new inquiries are considered a range of six to twelve months. If you are shopping around for the best rate try to keep the search in more than one month. There are multiple websites where you can view your credit report on a monthly basis. You may get a free yearly credit report at www.annualcreditreport.com. It is important to review this report to be sure there are not fraudulent charges or incorrect reports of credit you owe that could affect your score.