Credit Score

Credit Score

Are you in the market to buy a home?  Are you interested in getting pre-approval for a home mortgage?  Are you concerned about getting the lowest possible interest rate.

Well, you credit score  will play a significant role in your ability to qualify for a good mortgage rate. The higher your FICO score, the less risk for obtaining credit, hence lower interest rate on your mortgage loan.

 Your FICO score ranks you in “Excellent” or “Poor” category depending on your payment history and other factors including length of credit and the amount of loans you have previously paid off.  

Your credit score is based on a set of 3 numbers generated by 3 different credit agencies  that most lenders use.  For instance, if you score 720, 710 and 690 on your FICO score, lenders will use the middle number or 710 to price your loan.  The range of FICO scores are from 300 to 850. Most people score between 600 and 800. This is the number needed to be considered a good risk for credit.

Key factors to improve your credit score:

  • On time payment history is the best indicator of credit worthiness to a lender. This accounts for 35% of your score and is based on your history of paying your bills on time. Late or missed payments will lead to lower FICO scores.
  • Your credit ceiling or the amount you have previously have borrowed will also impact your score.  This accounts for 30% of your credit score.  For instance, if you previously borrowed a loan and paid it off or refinanced it without any late payments, that will increase your score.  Also, if all of your credit cards are up to their available limit, you are  considered a higher risk borrower and will get a higher interest rate and a lower loan amount.
  • Your oldest credit cards and loans have the one of the biggest impacts on your credit score.  So, even if you have an old credit card with a $1,000 limit that you are not currently using, it might be wise to keep it open it since it will impact your FICO score positively. The length of your credit history counts for 15 % of the score.
  • A Combination of credit cards and revolving credit can impact your FICO score by 10%.  This creates a positive history with most lenders that you have been responsible with previous loans and credit cards.
  • If there are too many new credit inquiries on your history, this will lower your FICO score since it alarms lenders that you could be borrowing too much money.   The exception is for cases where there are similar inquires such as mortgage or a car loan application that happen within a short period of time.  So, it’s not advisable for you to apply for new credit cards every 2 months since it will lower your FICO score.

Finally, keep in mind that if you are running late on your payments you can develop a re-payment plan with your lender and negotiate a lower interest rate to help you avoid late payments.