Credit - Why It Matters

05-02-2019

Written by Grace Thomson

What is a credit score?

Your credit score, or FICO score, is a number that ranges from 300-850.  Virtually all lenders use your credit score as a factor when you apply for credit.  Whether you are applying for a credit card, a mortgage, a car loan, or refinancing your student loans, your FICO score will more than likely come into account.  And typically the higher your score, the better the terms and rates you will be offered by the lender.

 

What affects your credit score?

 Your score takes into account your payment history, the amount of debt owed, length of credit, types of credit in use, and new credit.  These categories account for various weights of your score and the weights will vary depending on your credit history.  Here is how the score breaks down for most people.

The biggest part of your credit score, 35%, is your payment history.  Have you made your payments on time?

The second largest part of your score, 30%, looks at the amount of debt you owe today. The higher the ratio, the riskier you will be viewed.

The length of your credit history makes up about 15% of your score.  Lenders will take a look at the age of your oldest account, youngest account, and average account.  Generally, the older your credit accounts, the better your score.

10% of your score will factor in the types of credit that you use.

10% of your score looks at new credit.

 

What hurts – what helps!

FICO, Equifax, Transunion – those are the 3 credit reporting agencies. A history of your past jobs and addresses, every payment for bills, loans, credit cards, as well as significant events like bankruptcies.

Here are things that can help or hurt:

• Credit to Debt ratio – If you have large access to borrowing, but you are utilizing a small percentage of it, then your credit to debt ratio is small, and that helps your score.
• Debt to Income ratio – Having low debt and high income will help your score, while high debt and low income will hurt.
• Credit inquiries – Whenever the credit reporting bureaus “pull” your credit to check and see how much credit should be given to you, you get a small deduction in your score. But this might be negated by being granted a larger access to credit. Whenever you apply for any type of credit, whether it be a loan or a credit card, a credit inquiry occurs.
• Bankruptcy hurts your credit score. No explanation needed

 

Credit – does it matter?

• Your credit score matters because the lower it goes, the more likely you are to default on debt in the eyes of creditors and lenders, and the more likely you are to receive higher interest rates on credit and loans.

 

 

Please reach out to one of the professionals at Blue Adobe Mortgage should you have any questions regarding your credit score or to get pre-qualified for a purchase of a home today!