What is a good credit score?
When determining if you qualify for a mortgage, the lender will look at your financial
history with a magnifying glass. But what exactly are they looking for and what is good
credit? The lender is concerned with two major factors:
- Your credit report. The credit report details your payment history on your loans,
any bankruptcy filings and other important financial information.
- Your credit score. Your credit score tells the lender what your overall creditworthiness
is. In other words, what risk there is of you defaulting on the loan? Credit scores are often
referred to as FICO scores. They range from 300 to 900, with most borrowers falling in the 600 and 700 ranges.
The higher your credit score, the less of a risk you are to the lender. A good credit score will help you
qualify for a good mortgage with favorable terms. A poor score means you will pay higher interest rates and
have stricter terms. There are many factors that determine your credit score.
- Past late payments.. Delinquencies in paying your bills will count against you. Studies have
shown that those who make late payments in the past will do so in the future. The more recent your late
payments are, the more they hurt your score. A 30-day late payment within the last year will hurt your
chances of getting a mortgage with favorable terms.
- Length of credit.How long your credit history is will affect your credit score. The longer you
have had good credit, the better. It establishes a pattern of good financial management that lenders are looking for.
- Credit limits, current amount on credit and available credit.. If you max out your credit cards
and are close to the limits on most of your loans, you will be viewed as risky. It is best to have moderate
levels of credit with low balances or no balances on them.
- Mixture of credit types.. Lenders want to see that you can handle debt. Someone with a combination of
revolving and installment debt is less risky than someone with only one credit card and nothing else.
Know your credit report
Why should you bother checking your credit report if the lender is going to check it too? Four out of five
credit reports contain errors. There's a pretty good chance that your credit report has a mistake that is
negatively affecting your credit and credit scores. You will want to fix these errors before applying for a mortgage.
You can obtain free copies of your credit report from each of the three credit reporting agencies, Equifax, Experian
and Trans Union. Each report will have small differences and different credit score scales. Look over the reports for
any errors. If you find a mistake, don't waste any time getting them fixed. If you see late payments and credit balances
that are correct, go ahead and prepare an explanation for them. The lender will ask you to explain them. Go through the
account numbers to make sure that they are correct. If there are any outstanding bills that you didn't know about, go
ahead and get them resolved. This sometimes happens when you move and the last bill for a utility isn't forwarded to
your new address.
To keep your credit report in the upper numbers you simply need to pay all of your bills on time, every time.
Take the time to learn more about your credit score and how you can improve it. A higher score saves you money
by getting you lower interest rates and insurance premiums.
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