Understanding Your Credit Score
Sep 09 2016
Many are unaware of how their credit score is determined and of the impact it has on a mortgage. When obtaining a mortgage your credit score is a critical element used in approving you for the product and in determining your interest rate. When approving a mortgage the bank analyzes the amount of risk they are acquiring by lending you funds, and your credit history is a crucial element in doing so.
The higher your credit score, the less risk they perceive and therefore they will offer you a lower interest rate. For this reason, understanding the components of your credit score is crucial.
There are five main factors used in calculating your score:
- The primary determinant is your payment history which accounts for approximately 35% of your score. Making your debt payments in full, before the due date is the best way to optimize your payment history.
- Approximately 30% of your credit score is established by outstanding credit balances. Here, the primary goal is to carry a low credit balance in relation to the available credit; preferably, under 10%.
- Having established credit history, meaning you have had available credit for a significant length of time, accounts for 15% of your credit score.
- Approximately 10% of the score is determined by the type of credit available. Having a variety of credit facilities, for example auto loans, mortgages and credit cards is more desirable than debt purely held in credit cards, for example.
- The last element, making up around 10% of your credit score, is the number of inquiries submitted for your credit bureau. Each full inquiry on the credit bureau can reduce your score from between 2 and 50 points; it is therefore important to limit the number of inquiries.
I hope this credit information has been helpful and just wanted to remind you that should you have any questions or know anyone who is considering getting or refinancing a mortgage I would really like to hear from you.