When determining a credit score, there are many factors that go into a person’s credit report. When looking at credit history your loan officer at McLean Mortgage can give you some advice on increasing your credit score before taking out a mortgage.
“I always tell my clients that paying bills on time is by far the most important factor in determining your credit score,” says Mea Danigelis, Senior Loan Officer at McLean Mortgage. “If you are currently behind on payments, it is crucial to make the account current and keep it that way. Recent late payments will have a greater (negative) impact, but with time they will be less influential.”
Below are 5 key factors to follow to make sure you are ready for life’s next big decisions:
1. Your credit card payment history is a huge factor when determining a credit score
- A collection account can be the single most damaging influencer when it comes to derogatory reporting. In some cases, an account may have been paid in full, but that account is still reflecting a balance being owed. Having the reporting brought up to date may result in a substantial improvement in the credit file.
- Certain kinds of debt are deemed to be more important or influential than others. These accounts seem to carry more weight when calculating scores. A late payment on a mortgage is far more damaging than a department store credit card. The “unofficial hierarchy of credit” with regards to credit scoring appears to be something like this:
- Home Mortgage
- Student Loan
- Installment loan / Lease payment
- Major Credit Card
- Department Store Credit Card
- Finance Company Debt
- Closing an account will not remove its history from your report. That information will remain on a report for at least seven years.
2. The balances of accounts are responsible for approximately 30% of your credit score
- Keep balances low on credit cards and other “revolving credit.” High outstanding debt can affect a credit score.
- Pay off debt rather than moving it around. The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
- Do not close unused credit cards as a short-term strategy to raise your score.
- Do not open several new credit cards that you don’t need, just to increase your available credit. This approach could backfire and lower your score.
3. The length of credit history is responsible for around 15% of your score…
- Opening new accounts will lower the average age of your existing accounts, thus lowering your credit score.
- The amount of time since the account was last used will also be a factor. Dormant accounts will have less of an affect than those that are used on a regular basis.
4. New Credit is responsible for approximately 10% of your score…
- Avoid opening numerous “new accounts” at the same time. A drastic increase in the amount of available credit (over a short period of time) will have an adverse effect on credit scores.
- It is highly recommended that shopping for financing take place over a short period of time. Credit scoring can differentiate between a search for a single loan (a car or mortgage for example) and a search for multiple lines of credit (credit cards and department store lines of credit).
5. The types of credit used will determine around 10% of your score…
- Having more than 5 revolving (credit card) type accounts can have a negative effect on credit scoring. This can lend itself to overextension by having too much credit available.
- Having fewer than 5 revolving accounts can also have a negative influence. This may be viewed as an inability to obtain and/or maintain credit.
Knowing all these factors up front will help you be prepared for the day that you decide to purchase your dream home. Having a low credit should never deter you from wanting to be a homeowner. There are plenty of resources to help you get your credit back in good standing.
For additional information on credit, you can visit www.annualcreditreport.com