Credit Scores and How to Improve Them

When seeking a mortgage loan for a home, your credit score will be the single largest factor taken into consideration by potential lenders. As such, it is important for you to take whatever steps possible to improve your score. To better understand how to improve your score, it is helpful to have a better idea of what your credit score is and how it is calculated.

Payment History

Your credit score is calculated by gathering data related to five different categories. The first of these categories is your payment history, which accounts for about 35 percent of your score. Your payment history refers to how frequently you made payments toward paying off your debts on time. The more you miss making payments on time, the lower this part of your score will be. Therefore, in order to improve this part of your score, you need to regularly pay your bills on time over a long period of time.

Amounts Owed

The amount you owe on current loans accounts for 30 percent of your credit score. While having open accounts to which you owe money will not necessarily count against you, owing a large amount of debt can be problematic. It is also important to note that the amount you owe versus the amount of credit that is extended to you plays a part in determining this part of your score. For example, if you owe $3,000 on a credit card with a $3,200 credit limit compared to a credit card with a $10,000 credit limit, your score will be negatively affected. To help improve this part of your score, try to keep your debt spread out and pay down your debt so you are not pushing yourself toward maxing out your available credit.

Length of Credit History

The length of your credit history accounts for about 15 percent of your credit score. The longer you have had a credit account open, the better your score will be. Therefore, if you choose to close out credit card accounts that you no longer need, consider hanging on to them until after you have acquired a loan. Or, if closing accounts now is absolutely necessary, hang on to the ones you have had the longest.

Credit Mix in Use

Credit mix in use accounts for 10 percent of your credit score. This category refers to the variety of different forms of credit that you are utilizing. As such, your score will be better if you have a healthy mix of installment loans, finance company accounts and credit cards rather than all one form of credit.

New Credit

Whether or not you have opened new forms of credit is used to calculate the final 10 percent of your credit score. The larger the number of inquiries into your credit, the lower your score will become. Therefore, in order to get the highest score possible, you should avoid opening new accounts before you are getting ready to apply for a home mortgage loan.

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