FINANCING YOUR HOME PURCHASE
Improving Your Credit Score
FICO scores are based on specific credit history, with hundreds of inputs used to find your score. There are 5 main parts of your credit score:
1. Payment History: 35% of your credit score
Payment history measures how you’ve paid on your debts. Payment history is the largest part of your credit score because if you’ve recently missed payments your creditors, it’s likely those missed payments will continue, and may lead to default. Payment history also measures how “severe” a missed payment has been. An item in collection is worse than an item paid 30 days late.
Tip to improve: Make payments on time, all the time — even items in dispute. Pay the bill and worry about refunds later
2. Amounts Owed: 30% of your credit score
Amounts owed measures how “maxed out” you are. It is the second-largest part of your credit score because a person that is maxed out has no safety valve in the event of a crisis. Amounts owed is not about the dollar amount you’re borrowing — it’s about the dollar amount you’re borrowing relative to the amount available to you.
Tip to improve: Don’t close out “old” credit cards, and don’t lower your available credit limits. Having access to credit is good.
3. Credit History Length: 15% of your credit score
Your credit history is your track record with respect to managing credit. It matters in the FICO model because “experienced users of credit” are viewed differently from new users. Similar to the hiring process for a job, the credit bureaus want to see that this isn’t your first experience.
Tip to improve: Don’t close cards with “history”. You need them to show you’re experienced with credit.
4. New Credit: 10% of your credit score
This category accounts for your recent attempts to secure new credit. In general, the more credit for which you’ve applied, the more damage it will do to your credit score. This is more true for credit cards than for mortgage applications. A consumer in search of new credit cards is presumed to “need” more credit lines.
Tip to improve: When you shop for a mortgage, multiple credit checks can count as a single credit inquiry, protecting your credit score.
5. Types of Credit: 10% of your credit score
The type of credit you carry matters and not all credit types are the same. Installment loans such as mortgage loans and student loans, for example, are considered “better” than credit cards and charge cards. This is because installments loans eventually pay down to zero. Consumer cards, by contrast, can only go up.
Tip to improve: Don’t carry an abundance of store charge cards. Interest rates are high and the FICO model looks unfavorably upon them.
[Next MONDAY FINANCE TALK…: “5 Steps to Save for a Downpayment”]
Thanks to Trulia!
- FICO Introduces New Mortgage Credit Score (prweb.com)
- Looking For A Loan? You May Have Better Credit Than You Think (aarp.org)