Improving your credit score is a key step in securing a better mortgage rate, which can significantly lower your monthly payments. Credit bureaus use several main variables to determine your credit score.
Firstly, your payment history plays the most significant role, accounting for 35 percent of your score. Consistently making on-time payments has a substantial positive impact, while late or missed payments can seriously hurt your score.
Secondly, your debt-to-income utilization is crucial, making up 30 percent of your score. This measures how much debt you have compared to your available credit. Ideally, you should keep your credit utilization below 30 percent, as high utilization rates can negatively affect your score.
Thirdly, the length of your credit history is significant, contributing 15 percent to your score. Lenders prefer borrowers with a proven track record of managing credit over time. Thus the longer your credit history, the better.
Additionally, your credit mix, which accounts for 10 percent of your score, is also considered. A diverse mix of credit accounts, such as credit cards, mortgages, and auto loans, is beneficial because it shows lenders that you can handle different types of credit responsibly.
Finally, new credit accounts comprise 10 percent of your score. Opening several new credit accounts quickly can be seen as risky behavior. Each new account adds a hard inquiry to your credit report, temporarily lowering your score.
By understanding these factors, you can make strategic decisions to improve your credit score, such as paying bills on time, reducing your debt, and maintaining a healthy mix of credit accounts.
Recently it came to my attention that not everyone understands the credit rating terminology. A “good” credit score isn’t really good. To get the better rates you need a score in the very good or excellent range. So when someone asks if you have “good” credit they actually mean are you in the very good to excellent range. Confusing but true