5 Factors That Decide Your Credit Score

Your credit score is an essential factor when it comes to buying a home. It determines whether a buyer qualifies for a mortgage and at what interest rate. Lenders use credit scores to assess the risk of lending money to potential homebuyers. Therefore, it is crucial to understand the factors that influence your credit score.

The five key factors that determin your credit score are: Payment history, length of credit history, amounts owed, credit mix, and any new credit recently obtained.  Let's dive into these five key factors.

1. Payment History: Your payment history is the most critical factor affecting your credit score. It accounts for approximately 35% of the total score. Lenders want to see consistent, on-time payments for all your debts, including credit cards, loans, and utilities.

2. Length of Credit History: The length of your credit history makes up around 15% of your credit score. Lenders want to see a longer credit history to assess your borrowing habits. If you have a limited credit history, it is advisable not to close old credit accounts, as they contribute to the overall length of your credit history.

3. Amounts Owed: The amount you owe on your credit accounts contributes to 30% of your credit score. Lenders evaluate your credit utilization ratio, which is the amount of credit you have used compared to your total available credit. It is ideal to keep your credit card balances low and avoid maxing out your credit limits.

4. Credit Mix: The variety of credit accounts you have also impacts your credit score, accounting for approximately 10%. Lenders prefer to see a mix of installment loans (such as mortgages or car loans) and revolving credit (such as credit cards). This demonstrates your ability to handle different types of credit.

5. Any New Credit: Opening numerous new credit accounts within a short period can negatively affect your credit score. This factor contributes about 10% to your overall score. Multiple credit inquiries can signal financial distress or a higher risk of default to lenders.

Understanding these factors can help you take proactive steps to improve your credit score before applying for a mortgage. It is advisable to review your credit report regularly, address any errors, and maintain good financial habits.