Ok 1st Time Homebuyers, you have decided you want to buy a home. Do you know what your credit score is? Most people know that they have a credit score, that magic number that lenders rely on to determine whether or not to extend credit, but don’t really understand what a credit score is, what factors influence their credit score, or how their credit score is calculated. 
Jeff Harris, Senior Credit Consultant with our mortgage company, has compiled a basic primer on what credit scoring is, how it works, and some tips on improving your score. We hope you find it most valuable.
Naturally, now is a great time to buy if your finances are in order. For your preapproval and green light to search for homes, please call us at 919-649-6638 or email us at FreemanR@hpw.com. The Freeman/Davis Home Team specializes in 1st Time Homebuyers and is eager to serve you. Visit us at www.HomeSearchRALEIGH.com and www.FreemanDavisHomeTeam.com for listings of area homes for sale. When you see the homes you would like to visit, click the showing request button and we will schedule your personal visit.
What Is a Credit Score?
In short, credit scoring is a system many lenders use to determine how likely you are to pay back the money they lend to you. Your credit score is a snapshot of your credit risk at a particular point in time. The higher your credit score, the more likely you are to repay your debts on time, and the more likely you are to receive credit on favorable terms.
How Is a Credit Score Calculated?
The most widely used credit scores are based on the Fair Isaac & Co. (FICO) credit scoring model. FICO develops credit scores based solely on information contained in credit reports; it compares the information contained in a consumer’s credit report to the patterns of information contained in thousands of other credit reports, and calculates a credit score that predicts the level of future credit risk for a particular consumer. While FICO is the most well known type of credit score, it’s not the only one out there – some check approval services also develop risk models and scoring that are based on check writing patterns in order to predict the risk of a particular check being returned. You may also have more than one FICO score as each of the three major credit reporting agencies collect and report information in slightly different ways; since your credit score from each agency only uses the information contained in that agency’s report, it’s possible to have three different scores.
What Factors Influence the Credit Score?
Your credit score takes all factors into consideration; no one piece of information or one factor will determine your score, although some factors are weighted more heavily than others.
- -Payment History – Your payment history determines approximately 35% of your total credit score. This factor looks at whether you pay your bills on time, or late. If they’re late, how late are they? How often do you pay late? How recent are your late payments? How many accounts show no late payments? Have you had accounts turned over to collection or a judgment entered against you? Have you filed for Bankruptcy?
- -Amount Owed – How much you currently owe determines approximately 30% of your total credit score. This factor looks at the total amount you owe, and on what types of accounts. How many accounts have balances? How much of the total credit line is owed? How much is owed now in relation to how much you borrowed originally (i.e. for auto loans)?
- -Length of Credit History – The length of your credit history determines approximately 15% of your total credit score. In general, a longer credit history will increase your score. This factor also looks at how long you’ve had certain credit accounts, and how long it’s been since you used certain accounts.
- -New Credit – Approximately 10% of your credit score is based on how many new accounts you’ve established. This factor looks at how many new accounts you have, how long it’s been since you opened them, how many recent requests for credit you have made, and the length of time since credit report inquiries were made by potential lenders. Rate shopping should not affect this factor because the inquiries will be made for a particular type of credit during a short period of time.
- -Overall Credit Mix – Approximately 10% of your credit score is based on the overall mix of credit cares, installment loans, mortgage loans, etc. The more balanced the mix, the more likely this factor is to improve your overall score.
Improving Your Credit Score
There are several things you can do to improve your credit score, both in the short term and over time.
- -Pay your bills on time.
- -Pay down your debt.
- -Check your credit report and correct any inaccurate items.
- -Limit how frequently you apply for new credit and how much you charge on existing credit.
- -Don’t close old accounts – this can shorten the length of your reported credit history.
The Freeman/Davis Home Team can put you in touch with the right people to get your credit report examined and provide you with expert consultation so call us today!