What Goes into a Credit Score?
5 Main components:
- Credit History - 35%
- Payment history: do you make your payments on time?
- Delinquencies: how many times have you made late payments in the last 12-24 months? A lender would like to see no late payments in the past year.
- Credit balances vs. available credit - 30%
- A good rule of thumb is to stay around 30% of available limit on all credit cards and any lines of credit.
- Example: if you have three credit cards with $1000 balances, it is better to have $333 on all of three than to have $1000 on one and $0 on the other two.
- Length of Credit history - 15%
- How long has an account been open and in use?
- Mix of Credit - 10%
- Do you have "Multiple" credit lines - example: home, car, and credit card?
- Too many are bad and too few are bad. You should have a good mix to receive the highest score.
- Inquiries - 10%
- Hard inquiries: If you have your credit report pulled for more credit, like when you apply for a credit card and they pull your credit.
- Soft inquiries: You or your employer check your credit (as long as your employer is not in the lending industry - i.e. Mortgage Company, bank, car dealer, etc.)
Now that you know what goes into a credit score we want to encourage you to seek financial decisions that will have a positive outcome on your credit score. When going through the mortgage process here are some guidelines to follow in regards to your credit score:
Things to NOT do during or leading up to your home purchase process
- Do not close any credit cards - it is best if you pay them down to 30% of your limit or to $0 but do not close them.
- Do not go over any credit limits on any line of credit or credit cards you have.
- DO NOT reply to ANY credit card companies trying to get you another credit card.
- Do not consolidate any credit debt.
- Do not open any other lines of credit: credit card, car loan, home equity line of credit, etc.
Things to do during you home Purchase Process
- Do make all of your minimum payments on time.
- Do save up as much cash as possible.
- Do put a budget together to help manage your mortgage and other finances.
- Do have fun and enjoy the process - this is YOUR new home!
Obtaining your Credit Report
As of March 1, 2005 everyone in the state of MI is eligible for one free credit report every year. We highly suggest that you utilize this opportunity annually for three reasons:
- You can see what your credit score is and if the actions you are taking are helping or hindering that score.
- You can see if anyone has stolen or is stealing your identity.
- You can make sure your payments are being reported correctly.
To obtain your free report please go to www.annualcreditreport.com