Every home buyer knows that their credit score is important. But does anyone really know what factors determine your credit score? A person's credit score is composed of five factors. Points are awarded for each factor and obviously the higher the credit score the better.
1. Payment History- 35% Impact
Paying debt in full and on time has the greatest positive impact on your credit score. Late payments, charge-offs and judgements all have a negative impact. Deliquencies that have occured in the last two years carry more weight than older items.
2. Outstanding Credit Card Balances- 30% Impact
This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep the balance as close to zero as possible and definitely below 30% of the avaliable credit limit at least 2-3 months prior to trying to purchase a home.
3. Credit History- 15% Impact
This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.
4. Type of Credit- 10% Impact
A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards only. You should always have 1-2 open major credit card accounts.
5. Inquiries- 10% Impact
The percentage of the credit score quantifies the number of inquiries made on a consumer's credit within a 12-month period. Each hard inquiry can cost from 2 to 25 points on a credit score, depending on the amount of points someone has left in this factor. Note that if you pull your credit yourself, it will have no effect on your score.
Remember that when you are going through the home loan process, your loan officer will pull all THREE of your credit scores. So be sure to sign up for a credit score watch program, so you know exactly where your credit stands.
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