What determines your credit score? Understanding FICO
A good credit score is an important piece of the financial puzzle when applying for a mortgage. Still, many homeowners are in the dark about what factors contribute to this important metric for credit worthiness. Let’s take a moment to discuss the makeup of your credit score and steps you can take to increase this important number before purchasing a home.
Your credit score, also called a FICO score, covers several aspects of your financial history when generating your three-digit score. The factors included in FICO break down like this:
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- New Credit: 10%
- Credit Mix: 10%
Here’s a brief explanation for each of these categories to help you better understand how your financial habits relate to your FICO score.
Payment History
The biggest factor when determining your credit score has to do with previous payments you’ve made to lenders. Payment history is especially concerned with any late payments you may have made, and how long it took you to make repayment. Generally, one or two late payments won’t harm your FICO score too much. A long history of missed payments could be a major red flag.
Bankruptcies, repossessions, and foreclosures are also considered part of your payment history. If you’ve experienced any of these situations, creating a strong history of on-time credit payments could begin to restore your credit score.
Amounts Owed
The next biggest contributor to your credit score is your current amount of debt owed. Generally, keeping a lower balance of debt will result in a higher credit score—especially when it comes to credit cards. Student loan debt, auto notes, home loans, and other common debts also factor into your amounts owed. Debt isn’t necessarily bad, but keeping a low balance when possible will be favorable for your credit score. Try paying off smaller loans and credit card bills to give this category a boost.
If you have strong credit but need help budgeting for your next home, try First Ohio’s free online mortgage tools. Get started here.
Length of Credit History
As the name suggest, length of credit history has to do with how long you have been borrowing money. The age of your newest and oldest credit accounts, average account age, and length of account activity all come into play here. People with longer credit histories have an inherent advantage here. If you have no credit history at all, you’ll have some catching up to do. Try meeting with your banker to explore options for a credit card other means of establishing a credit history.
New Credit
Credit inquiries (when someone checks your credit report) are considered in the new credit part of your credit score. Recent inquiries can be a sign that you are seeking credit for a loan. The number of accounts that appear on your credit score and the length that those accounts have been open can also come into play. When trying to keep your FICO score up to purchase a home, it’s best not to give lenders other reasons to perform credit inquiries, which may hinder your score. Avoid making big purchases on credit when possible or applying for new loans when you are considering applying for a mortgage.
Credit Mix
The last element of your FICO score has to do with the types of accounts that show up on your credit report. A wide variety of different debt types will actually be in your favor here. Account types that show up on your report can range from credit cards, mortgages, auto loans, student loans, and more. If you have a wide range of different loan types, your creditworthiness will be high. However, this doesn’t mean that you should take on a lot of new debt in an attempt to boost your score.
A strong FICO score is just one thing you’ll need to secure a home loan. If you have questions about this or any part of the mortgage process, the experts at First Ohio are standing by to help. Reach out to us today with any questions you may have about your next home loan.