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:
1) 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.
2) 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%.
3) Having established credit history, meaning you have had available credit for a significant length of time, accounts for 15% of your credit score.
4) 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.
5) 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 love to hear from you.
