If you’re in the market for a loan, you must be prepared for your finances to come under scrutiny. After all, your lender wants to feel confident that you’ll be able to repay the loan. Whether you’re seeking a new credit card, a car loan, a mortgage, or some other line of credit, the prospective creditor is going to check your credit score. So what is a credit score? What affects your credit score? And why does your credit score matter?
What Is a Credit Score?
As myFico explains, a credit score is a numerical assessment of your creditworthiness. The most commonly used credit scores are the Fair Isaac Corporation’s FICO scores.
To determine your score, the company compares the information in your credit report with patterns established after a thorough evaluation of hundreds of thousands of credit reports. The result is a score between 300 and 850. The higher the number, the better your credit is. Would-be borrowers with better credit are seen as more likely to repay their debts, so lenders prefer to work with them.
What Affects Your Credit Score?
Your credit score isn’t set in stone; it changes as your financial history grows. Knowing what impact your actions will have on your credit score can help you safeguard a good score or polish a poor one.
Before we discuss what affects your credit score, let’s review some things that don’t. As The Balance notes, your age, marital status, race, gender, and employment status do not factor into your credit score. Even financial concerns like your income, bank balances, and use of debit or prepaid cards don’t count towards your credit score.
So what does affect your credit score?
Your Payment History
As Experian reports, your payment history accounts for 35 percent of your FICO credit score. That should come as no surprise since parties interested in your credit score are typically quite concerned with your ability to manage your money and repay your debts responsibly. Paying what you owe on time and in full will keep your score high; missing payments will cause it to sink.
Your Credit Utilization
According to Investopedia, the amounts you owe determine 30 percent of your FICO credit score. Credit reporting agencies will look at your credit utilization ratio, which is the amount of your credit balance compared to the credit limit. How much do you owe? How much of your available credit have you used? How much do you owe on specific types of debts? How much of the original totals have you paid off? Generally, less debt is better. However, some use of credit is important because it demonstrates that you know how to handle credit responsibly.
Your Credit History’s Length
How long have you been using credit? As CreditCards.com reports, your credit history is 15 percent of your FICO Credit Score. As long as it’s not littered with missed payments and other red flags, a long history wins points because it provides a reassuring track record. So if you’re hoping to polish your credit score, don’t close out old credit card accounts that you don’t use anymore. Closing long-standing accounts can lower your credit score. However, a short credit history won’t hurt you as long as it’s free of financial trouble.
Your New Credit
Opening many new credit accounts in a short period is often seen as risky behavior, which is why shopping for or opening new lines of credit determines 10 percent of your FICO credit score. As myFico reports, checking your credit score won’t have an impact, but opening several new accounts in a brief period will, especially if your credit history is fairly short. To avoid lowering your credit score, don’t move too quickly as you open new accounts.
Your Credit Mix
Credit mix refers to the diversity of your credit usage, and as Experian indicates, it accounts for 10 percent of your FICO credit score. Why do creditors care about how varied your credit usage is? Balancing different kinds of credit accounts demonstrates that you can handle different types of debt at the same time.
Why Does Your Credit Score Matter?
Why does your credit score matter so much? For starters, it can mean the difference between approval and denial when you are searching for a mortgage, car loan, credit card, or other form of financing. Your credit score may also determine what options are available to you. Some loan programs require specific credit scores; others are willing to work with people with lower credit scores, but borrowers with low scores will generally have to pay a higher interest rate.
If you’re wondering how your credit score will affect your mortgage options, we would be happy to help. At PrimeLending Twin Cities, our loan officers thrive on helping clients find the right loans for their circumstances. Whether you’re interested in purchasing a home, eager to renovate, or ready to refinance, our expert team can guide you through the loan process. Contact us today for more information.