Whether youre looking to buy a home, refinance your existing mortgage or take out an auto loan, its crucial that you know your credit score and how it could impact your financial situation. A good score can help you qualify for the right financial products with better interest rates, terms and credit limits.
A credit score is a number that lenders use to predict your ability to repay your loans and credit card bills on time. Several credit-scoring companies, including FICO(r), VantageScore(r) and Experian(r), issue these scores.
All credit-scoring models depend on the same data–information from a person’s credit reports–to calculate a score. The different scoring models are based on slightly different ways of calculating that data, so the results will be slightly different from one to another.
The credit report is a history of all your open lines of credit–credit cards, car loans, student loans and installment payments like your cellphone contract–plus any new accounts you have opened in the last year. It also records your payment history, which includes late payments and any resulting negative marks.
This report can be accessed for free once a year from each of the three major credit reporting agencies (Equifax, TransUnion and Experian). Be sure to check your credit regularly and file any disputes that come up so that your credit score doesnt get harmed by any errors on your report.
Your credit score is a number thats calculated based on your debt, payment history, and other factors. Lenders use this number to determine if youre a risky borrower.
There are several ways to boost your credit score, but it takes time and effort. Paying your bills on time, limiting the amount of debt you have and not applying for new lines of credit can all improve your score over time.
Type of Credit counts for 10% of a credit score and shows whether you have a mix of installment credit (car loans, mortgages) and revolving credit (credit cards). The length of your credit history is also considered. If you have a long credit history, it means youve been managing your debt responsibly.
You can change your types of credit by closing some of your old accounts and opening new ones, but this will have a temporary negative effect on your credit score. Youll also want to keep your oldest accounts open, since theyre still contributing to your overall credit score.
A hard inquiry, when a lender checks your credit for a new loan application, will lower your credit score temporarily. However, this will be short-lived and your score should recover after the application is approved.
The process of applying for a mortgage can be stressful and time-consuming, but it will ultimately lead to your dream of owning a home. It will also give you an opportunity to build a positive credit history and start your journey to financial freedom.
A successful mortgage can be one of the biggest investments you will ever make in your lifetime, so dont take it lightly! Taking the necessary steps to improve your credit and make sure you get the best terms and interest rates can save you money over the life of your loan.