Credit scores, along with your overall income and debt, are big factors in determining if you will qualify for a loan and what your loan terms will be. Credit scores range between 300 and 850 and in general, scores above 620 are considered favorable when you are looking for a mortgage. Simply put, higher credit scores make mortgage lenders like you more. The most commonly used credit scoring system was developed by the Fair Isaac Corporation and is known as the FICO score. (Check out myfico.com for more info.)
Five general areas are calculated to determine your FICO score, each with a different level of impact:
- Your payment history: Do you pay your bills on time? Do you sometimes pay them late? How late? Do you have bankruptcy or debt collection activity in your history? 35%
- Your current credit balance: Do you owe a bunch on your credit cards? Do you have a good proportion of outstanding balance to total credit limit? 30%
- The length of your credit history: The longer your accounts are open, the better. 15%
- How much new credit you have: Did you recently open some new accounts? What kind of accounts? 10%
- The types of credit you have: In general, a sampling of credits cards, retail accounts, installment loans, mortgages, etc is your best bet. 10%
