What is a Credit Score?
When shopping for a new home, the higher your credit score, the higher your chances of locking in a reasonable interest rate on your mortgage. Credit score is a term you hear a lot, but what is it exactly? Your credit score is the number used by lenders to determine how likely you are to repay your debt on time if they give you a credit card or loan. Personal credit scores are based on credit history, with scores ranging from 200 up to 850. In order to secure a mortgage, anything over 620 is considered desirable.
Factors that Affect Credit Score
That said, there are several key factors that influence your credit score. These factors include:
Have you had a lot of late or missed payments? Or do you pay everything on time? Moreover, liens, bankruptcy filings, and collection activity can also affect your credit history.
Total Outstanding Debt
When a person owes considerable amounts of money on numerous accounts, it can show that the person is overextended financially. At the same time, spreading your debt over several accounts is a great way to prevent approaching the maximum credit line on your accounts.
Length of Credit History
When did you open your first credit account? Typically, the longer you've had accounts open, the better it looks to lenders.
Amount of New Credit
As we discussed, the age of your credit accounts matters. While older accounts look good, newer accounts are considered riskier regardless of whether they're credit cards or installment loans. This is true even when the debt is paid down quickly.
In general, it's a great idea to have more than one credit type in your history—for example, credit cards, installment loans, mortgages, and auto loans.
The Bottom Line
Ultimately, the best thing you can do is monitor your credit regularly. This will help you keep an eye on these factors and how they affect your credit, which will enable you to more easily find ways to improve your score when needed. Generally, the easiest way to improve your credit score is to pay your bills in full and on time each month.
At the end of the day, having a decent credit score is crucial for your financial well-being. So, always remember, the higher your credit score, the less of a credit risk you are.
Are you looking for more information on buying a home or obtaining a mortgage in the Mid-Missouri region? If so, we want to help! We'll be happy to answer all of your questions and can connect you with a reputable and trusted local lender if needed. Call us today or fill out our contact form below.