J0438810 You have likely heard how important your credit score can be in securing a mortgage and getting the best interest rate. Have you ever wondered how it is calculated?

Here are the five factors that are used in credit scoring, with the percentage each factor plays in determining your total score.

Payment History – 35%

Paying your bills on time is the most important factor, because it tells a lender how you are handling the credit you currently have. If you have late payments or are struggling to catch up, contact your creditors to work out a payment schedule. Be aware that paying off a collection account will not remove it from your credit report…it will stay on your report for seven years.

Amount Owed – 30%

How much you currently owe in relation to your available credit is almost as important as your payment history. You should keep at least 3 credit lines open, but it's a good idea to keep balances below 25% of your available credit because having available credit can help your ratio of debt to credit. Even if you pay everything off each month, a high average balance can negatively impact your credit score. If pay off and stop using a credit line they may no longer consider it, which could also negatively impact your debt to credit ratio.

Length of Credit History – 15%

Generally speaking, the longer your credit history the better your score in this area. That is why it is usually not a good idea to cancel old credit cards and get new ones.

Pursuit of New Credit – 10%

This can tie in with the length of your credit history, creating a double negative when you apply for numerous new credit cards. Every time a lender runs your credit, an inquiry is recorded. If you are applying for a loan, don't apply for new credit cards first. If you are applying for an auto loan or a mortgage, group inquiries close together. A group of multiple inquiries within 14 days of each other are treated as one, because it likely represents a search for the best rate on a single loan.

Various Types of Credit Experience – 10%

Although not normally a key factor in determining your credit score, it can make a difference if your score is close. What types of accounts you have, and how many can have a big impact but the optimal ratio depends on your profile and varies from person to person. It is good to have a healthy mix of installment loans, retail account, credit cards and mortgage. The factor that seems to carry the most weight in this category is your percent of open installment loans…too many can lower this portion of your score.

Tips for improving your credit score

Everyone is entitled to one free credit report per yearfrom each of the three credit bureaus…Experian, Equifax and TransUnion. It is common for reports to have mistakes or incorrect information, and a good place to start is checking your report and repairing any errors. Then make sure to pay your bills on time, keep your balances low and only apply for credit you need.

Sharlene Hensrud, RE/MAX Results - EmailHomesMSP.com

RELATED POSTS

About Sharlene Hensrud

I love what I do! Highly insightful, analytical and creative, there is nothing I love more than helping you find the right solution for your real estate transition. My mission is to serve my clients with honesty and integrity, exceeding their expectations in service and support… and to help others by donating a portion of every transaction to Habitat for Humanity

Related Posts

How one late payment could kill your mortgage approval in a hurry

Credit score requirements for getting a mortgage are more important than ever and most lenders now require a score of at least 640 to get financing approval. Your interest rate will also be determined based on your credit score so it can have a long-term effect on your finances. What many people don't know is how big.

Read More

DOM, CDOM and now PDOM… what they are and how they are helpful

It used to be that one of the first questions I would get from buyers looking at properties was, "How long has it been on the market?" That was when DOM information was only available to Realtors. Days On Market (DOM) data has been available for buyers for quite a while now, with CDOM a.

Read More

Good reasons not to buy a home right now

With mortgage interest rates as low as we can remember and the S & P Twin Cities home price index back to 2001 levels you have likely been hearing a lot about what a great time this is to buy a home. That may be true, but not everyone is ready to become a homeowner… and homeownership.

Read More