Credit scores play a vital role in buying a home, acting as a main factor in securing a mortgage, influencing the interest rates you get, and sometimes, determining whether you will qualify for a loan at all. At CUSO, we understand the importance of a healthy credit score and strive to support you in navigating this essential element of your financial landscape.
What Is a Credit Score?
A credit score is a numerical expression that lenders use to evaluate the risk associated with lending you money. It reflects your creditworthiness, based on your credit history. The most common type of credit score used in the lending industry is the FICO Score, which ranges from 300 (poor credit) to 850 (excellent credit).
- Poor: Between 300 and 579
- Fair: 580 to 669
- Good: 670 to 739
- Very Good: 740 to 799
- Excellent: 800 to 850
When you apply for a mortgage, your credit score becomes an important part of the evaluation process. At CUSO, we view it as a representation of your financial responsibility and reliability.
A higher credit score generally translates into lower mortgage rates and better loan terms because it reassures lenders that you’re less likely to default on your loan. On the other hand, lower scores might lead to higher interest rates, or in some cases, might mean you’re not eligible for a mortgage.
Breaking Down Your Credit Score
Your credit score is calculated based on several factors. Understanding these components can help you better manage your credit:
- Payment history (35%): Consistency in paying your bills on time is crucial. Late or missed payments can negatively impact your credit score.
- Amounts owed (30%): This represents the total amount of credit you’re using relative to your available credit limit, also known as your credit utilization ratio.
- Length of credit history (15%): The length of time you’ve had credit matters, with older accounts can positively affecting your credit score.
- Credit mix (10%): Having a variety of credit types, such as credit cards, student loans, or a car loan, can show lenders you are able to manage credit well.
- New credit (10%): The number of new credit inquiries or new opened accounts can temporarily lower your score.
Improving Your Credit Score: Tips from CUSO
Having a high credit score can open a lot of doors, including homeownership, but if your score isn’t where you’d like it to be, don’t despair. We’re here to help you with practical steps to improve your credit health:
- Make Payments on Time: Consistently paying your bills on time is one of the most effective ways to boost your credit score.
- Pro Tip: Set up automatic payments or reminders for bill due dates to ensure you never miss a payment. Consider using budgeting apps or setting calendar alerts to help you stay on top of your payment schedule.
- Lower Your Credit Utilization Ratio: Try to keep your credit card balances low and limit the number of credit cards with balances.
- Pro Tip: Pay off your balances in full each month, if possible, rather than just making the minimum payment. This not only helps you avoid accruing interest but also keeps your credit utilization low.
- Don’t Close Old Credit Cards: Keeping old accounts open can lengthen your credit history, which can positively affect your score.
- Pro Tip: Even if you don’t use credit cards often, consider keeping one open and active. Set up a small, recurring transaction on the card, and set up automatic payment in full every month. This could be for a streaming service, utility bill, or other nominal monthly expenses.
- Limit Hard Inquiries: Only apply for new credit when necessary, as too many inquiries can negatively impact your score.
- Regularly Review Your Credit Report: Mistakes happen. Regularly checking your report can help catch any inaccuracies and ensure your credit history is accurately represented.
- Pro Tip: Take advantage of your free annual credit report provided by each of the three major credit bureaus: Experian, Equifax, and TransUnion. Spread these out across the year (one every four months) to consistently monitor your credit throughout the year. Look for any inaccuracies, like mistaken late payments, incorrect balances, or fraudulent activity. If you spot an error, promptly report it to the credit bureau and the organization that provided the information.
As you embark on your home financing journey, remember that understanding and improving your credit score is just as important as finding the perfect home. By understanding your credit score and taking steps to improve it, you’re not just working toward better loan terms and interest rates – you’re investing in your financial future.
CUSO Home Lending is committed to empowering you in your home buying process, providing the guidance and resources necessary to boost your credit health and bringing you one step closer to your dream home. Contact one of our loan officers today to see how we can help!