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Building a Credit Score: Five Factors

​​Your credit score is an important factor for getting mortgage approval and determining what your interest rate will be. Learn more about the factors that make up your credit score and how to keep those numbers up!

Though there are many factors that make up your credit score, these are most easily broken down into five categories: payment history, amounts owed, length of credit history, new credit, and credit mix.

Credit Score Factors

Payment History | 35%

Your payment history is the most important determining factor for your credit score. Payment history shows that you are paying off your credit accounts on time, whether it's a credit card account, a car payment, a student loan payment, or paying rent. A single missed payment can be destructive to your score, so be sure to always make your payments on time – even if you can only pay the minimum amount! Making consistent, on-time payments is the best way to keep your credit score in good shape.

Amounts Owed | 30%

This category refers to how much of your available credit you are actively using. A general rule of thumb is to try to keep credit utilization to a maximum of 30%. For example, if all of your credit accounts totaled $20,000, you would not want to owe more than $6,000 across all of your accounts. If you are consistently maxing out your credit utilization, this can be a warning sign to lenders that you are overextending your income, and that can lead to higher risk of default - and a lower chance for mortgage approval.

Length of Credit History | 15%

While not a requirement for having a good credit score, a history of positive credit behavior does help your score. There is not much you can do for this category to boost your score (unless you have a secret time-traveling Delorean in the garage), but there are best practices to help you avoid hurting your credit history.

  • Keep your oldest credit accounts.

  • Don't open new credit accounts when applying for a mortgage. This includes things like buying a new car or getting a new credit card. Your new account will lower the average age of your credit and will likely knock your score down.

  • Use your old accounts so they don't go dormant. Even if you simply purchase gas or groceries on an older card every once in a while, keeping your accounts active will help keep your credit history healthy.

Credit Mix | 10%

Your credit mix refers to the different types of credit accounts in your name. Keeping up with a couple of credit card bills, a car payment, a student loan, and an Amazon Store Card shows healthy credit habits. It isn't necessary to have every type of credit account, but having a good mix can certainly help your score.

New Credit | 10%

Too many new accounts will reflect poorly on your credit score. If you are opening multiple new accounts, lenders could view that as a red flag that you are cutting it close to your budget and relying too heavily on credit.

One important exception to this rule is the 45-day mortgage application window. Credit bureaus understand that you may be shopping for a mortgage window, so once your credit is pulled by a mortgage company, you have a 45-day grace window to have your credit pulled by other lenders as well.

Credit Category Variances

While these categories are core credit factors for everyone, each credit profile is unique, and these factors may be weighted differently for different people. For example, an individual with a long history of credit will not be evaluated on the same scale as someone who has only utilized credit for a couple of years. It's important to keep these categories in mind, especially when trying to improve your credit score, but there is not an exact science to measuring each factor's exact importance to your score at any given time.

Credit Scores and Mortgage Approval

Your credit score is one of the three main factors lenders look at for mortgage approval. Different loan programs have different credit score requirements, with 580 typically being the lowest score you can have for approval. Remember, higher credit scores lead to better interest rates, so work on maintaining a healthy credit profile.

Get in touch with our team today to start talking through the best mortgage options for you!

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