Homebuying Tips: The 5 Biggest Factors that Make Up Your Credit Score
Buying a home takes a lot of planning, decision-making, and time. Many moving pieces go into the home-buying process, from building a budget to finding the right home and more. Finding funding is one of the most important and daunting parts of buying a house, and working with mortgage lenders can be a hassle. For this reason, it is crucial to beef up your credit score before applying for mortgage preapprovals.
Your credit score plays a massive role in the final loan offers that you will get. From maximum loan amounts to the stated interest rates, your credit score influences many things. This post is going to explain 5 of the biggest factors that make up your credit score. While this information should be helpful for you, we are not financial experts and are not liable for any financial decisions that you make. Rather, we recommend that you think about this advice while discussing it with your financial planner or advisor.
1. Your Payment History
By far, one of the most important components of your credit score is your payment history. Lenders want to loan money to people that they know they can trust, and having a flawless payment history is one of the best signals that you are a trustworthy borrower.
Carrying a balance on your credit cards is one thing, but missing payments outright is a different thing altogether. If you at least make the minimum payment every month, it shows lenders that you take your debts seriously and can be trusted. This is what makes your payment history one of the most important factors in your credit score.
In today’s day and age, it should be pretty easy to maintain a positive payment history – at least with credit cards. Most credit card companies allow for automatic online payments and have very user-friendly apps. If you set up automated payments, it is impossible to ever miss one. This is a surefire way to help your credit score.
2. Your Credit Utilization Rate
Credit utilization rate is another one of the most important factors that go into your credit score. It is basically a rolling monthly figure showing how much of your total credit allowance you use at a given time. For example, if all of your credit card limits add up to $10,000 and you have a balance of $4,000, your credit utilization rate would be 40%.
While a lower number is always better, it is always best to try to keep your credit utilization rate below 30%. This signals to lenders that you can be trusted with large amounts of credit and that you will not instantly ramp up your spending as soon as your credit allowance grows.
3. Any New Credit Applications
While many new credit cards offer lucrative signup bonuses, taking advantage of too many of them is always a bad thing. In fact, the number of recent hard inquiries on your credit report is one of the biggest factors in your credit score.
Applying for new credit cards always gets flagged on your credit report. While the flags do not always have a negative effect, too many of them are always a bad thing. For this reason, you should be strategic in the credit cards you have and the credit cards you apply for.
Credit cards carry many different benefits these days, and it is often nice to have a mix of different credit cards. Whether you like to travel, like cash back, or shop frequently at a certain store, there is likely a credit card out there that is a great option for you. As most people have a mix of interests, a mix of card types is often very beneficial!
With that being said, having multiple cards that overlap in benefits is usually unnecessary and potentially detrimental to your credit. Just because an airline offers you 60,000 bonus miles doesn’t mean you should apply for a credit card! The welcome bonus will fade over time, but the credit impact may linger.
4. Your Credit Mix
Your credit mix is a summary of the types of debts and credit lines that you have. From a mortgage to a car loan to credit cards and more, the mix is used by credit card companies to determine how much of a risk you are.
Not everyone will have all of these types of loans and credit lines. While most people have a credit card these days, not all people have a car or a house to pay off. Obviously, you shouldn’t go buying a car or taking out a personal loan just to improve your credit score!
This point is also very important for prospective homebuyers. A mortgage is an incredibly valuable loan, and it is likely the biggest one a borrower will ever take out in their lifetime. If you have a mix of fixed monthly payments already that is pretty high, it may have an impact on how mortgage lenders view you as a candidate.
5. Your Credit History
While your payment history has to do with you making timely, consistent payments, your credit history has more to do with how long you’ve had certain credit cards, what types of loans you have had in the past, and whether or not you’ve prematurely had to default on them.
One of the biggest parts of your credit history is the average age of your credit card accounts. This is the piece of the puzzle that is often hard for young homebuyers, as there is simply very little that they can do to improve their credit tenure. The only action young homebuyers can take to help this aspect is actually inaction; by not opening any new credit cards, your average credit card age will steadily rise. Each time you open a new card, that average age goes back down and the clock more or less resets.
Thanks for reading our post on the five biggest things that can impact your credit score. We hope that this post has been helpful and informative as you go through the home-buying process. While having a good credit score isn’t necessary for all home purchases, it does always help! Again, we are not liable for any ramifications of financial decisions that are made as a result of the advice in this post. Rather, we are simply aiming to help you to make informed decisions regarding your credit score as you get ready to purchase a new home. Purchasing a new home is one of the most exciting moments of your life, and it would be a real shame to have a bad credit score throw things out of whack.
If you visit Myrtle Beach or any other place in South Carolina and fall in love, we’re here to help. We at The Boyd Team are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at eddie@boydteam.com or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.
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