Credit Scores 101
There are several factors that can affect your credit score and therefore your mortgage rate. Here are the top five factors that are considered when calculating a credit score:
Payment history: This is the most important factor in determining a credit score. Payment history refers to whether an individual has made their credit payments on time. Late or missed payments can have a negative impact on a credit score.
Credit utilization: Credit utilization refers to the amount of credit that an individual is using relative to their credit limit. High credit utilization can have a negative impact on a credit score.
Length of credit history: A longer credit history generally leads to a higher credit score. This is because lenders view a longer credit history as an indication of stability and financial responsibility.
Credit mix: Credit mix refers to the variety of credit accounts that an individual has. Having a mix of different types of credit accounts (such as a mortgage, a credit card, and an auto loan) can help improve a credit score.
New credit: Opening several new credit accounts in a short period of time can have a negative impact on a credit score, as it may indicate to lenders that the individual is taking on too much new debt.
To improve your credit score and thus get a lower mortgage rate, here are some steps you can take:
Make sure you pay all of your bills on time. Payment history is the most important factor in determining your credit score, so it's crucial to pay your bills on time. If you have a history of late or missed payments, try setting up automatic payments or reminders to help you stay on track.
Keep your credit utilization low. Credit utilization refers to the amount of credit you're using relative to your credit limit. To improve your credit score, try to keep your credit utilization below 30%. This means you shouldn't use more than 30% of your available credit at any given time.
Don't open too many new credit accounts at once. When you open a new credit account, it can temporarily lower your credit score. To minimize this effect, try to spread out your credit applications rather than applying for multiple accounts at once.
Don't close old credit accounts. A longer credit history can help improve your credit score, so it's generally a good idea to keep old credit accounts open as long as you're not being charged an annual fee.
Check your credit report for errors and dispute any mistakes. It's important to check your credit report regularly to make sure everything is accurate. If you find any errors, be sure to dispute them with the credit bureau.
See our blog post “Mortgage Rates 101” to learn about the other factors that affect your mortgage rate.