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What You Need to Know About Your Credit Score

homebuyer computing his credit score

Your credit score matters when applying for any loan, especially one to be used for buying a home. Lenders need a guarantee that you can repay them, and one indicator of this is your credit report. A good credit score will prove to them that you are a reliable payer.

What affects your credit score?

The typical range of a credit score can go from 300 to 850, with 850 being the highest. Those who register a credit score that high have a clean debt payment history.

What is a debt payment history? This includes previous and present financial obligations like your college loan, credit card payments, mortgage payments, car loans, repossessions, bankruptcy, and foreclosure (if there is any) — all of which affect your credit score.

Debt payment history makes up 35% of your credit score. It carries the most weight since it tells creditors if you are capable of paying them back on time or not.

Another factor is your credit utilization ratio, which indicates how much of your available credit you are using. Credit utilization makes up 30% of your credit score. Other factors also include your credit history length (15%), credit mix (10%), and new credit accounts (10%).

What hurts your credit score?

The following are the common activities that can negatively affect your credit score and how long they will stay on your credit report:

  • Late or missed payments. Every late or missed payment can hurt your credit score, even if it only happened once. These remain in your credit report for up to seven years, but their negative impact eventually decreases over time.
  • High credit utilization. Using too much of your available credit also hurts your credit score. If you are using more than 30%, this could be a red flag for creditors. Lenders calculate your credit utilization ratio by dividing your total revolving credit from the total of your credit limits.
  • Applying for multiple new loans within a short period. Every request for your credit report by a lender usually merits a hard inquiry. Hard inquiries indicate the times you have applied for new credit. If there too many hard inquiries in a short time, this could mean that you are being denied new credit or that you are in desperate need of money. Hard inquiries stay on your credit report for two years.
  • Defaulting. Defaulting on credit accounts involves more critical credit issues, such as bankruptcy, repossession, foreclosure, and settled accounts. These can stay on your credit report for up to a decade.

How to Check Your Credit Score

While achieving a perfect credit score of 850 may not always be realistic, different lenders will have different criteria and requirements when it comes to what they consider to be a good enough credit score. In general, having a credit score between 750 and 850 is considered excellent, 700 to 749 is good, 650 to 699 is fair, and anything lower than 650 is poor.

There are online resources that could help in giving you your credit score or even a copy of your credit report for free. Meanwhile, credit-reporting agencies, such as Equifax, Experian, and TransUnion, can provide your credit score and report – but with a fee. FICO holds a more comprehensive copy of your credit report, as they gather all data from the three above-mentioned agencies.

Make sure to check your credit score annually so that you could dispute any errors on your credit report, as well as take necessary actions to improve your credit score.

How to Improve Your Credit Score

Apart from getting higher chances of success in securing a home loan with a favorable credit score, you can also get additional benefits, like lenders competing to offer you the best deals and lower interest rates.

Note, though, that having a lower credit score does not automatically mean you will lose your chance to get approved for a loan. While it can be tougher to score a loan, there may be lenders that will still give you a mortgage but with a higher interest rate.

You can improve your credit score by:

  • Paying down your debt, such as credit card balances.
  • Paying your bills on time.
  • Disputing errors on your credit report.
  • Limiting new credit applications.
  • Making your outstanding payments up-to-date.

For more information on applying for home loans, get in touch with our team at Heritage Realty Group. We can help you find the best home loan deals for buying a home in Pennsylvania, as well as advice on first-time homebuyer programs in PA.

We can also point you toward the loveliest houses for sale in State College, PA that you can call your next home. Call us now at 814.231.0101 or drop us a note here and let’s discuss your real estate options.