If you are thinking about buying a home in Colorado, it helps to understand the factors that impact your credit. A credit score is a number that predicts how likely you are to pay back a loan on time.
It is built from the information in your credit reports. Most scores fall between 300 and 850.
You do not have just one credit score. Your scores can differ based on the scoring model and the credit bureau that supplied the data.
Even the day they were pulled can matter. The CFPB credit score guide explains this in more detail.
Your score is one part of the picture. Lenders may also look at your income, your work history, and the type of loan you want.
A higher score may help you find better rates or terms. Still, no score guarantees approval or a specific rate.
FICO groups the data in your credit report into five categories. FICO's score breakdown weights them this way.
FICO notes that how much each factor matters can vary from person to person. The score also uses only what is in your credit report.
Your age, income, and where you live are not part of it.
Paying on time is the biggest part of your score. It shows lenders how you have handled past bills.
A late payment usually does not show up on your report until it is 30 or more days past due. Once it does, it can hurt your score.
The damage can grow the further behind you fall.
Late payments can stay on your credit report for up to seven years. Still, one or two late payments may not ruin your score.
A strong overall history can help offset them.
This factor looks at how much you owe. A big part of it is your credit utilization.
That is the share of your available credit you are using. It mainly applies to credit cards and other revolving accounts.
Divide your balance by your credit limit. For example, say you owe $600 on a card with a $2,500 limit.
That is 24 percent utilization. Scoring models look at each card on its own and at all your cards together.
A common guideline is to keep utilization below 30 percent. People with the highest scores tend to stay under 10 percent.
Paying down credit card balances can be one of the faster ways to help your score. If you plan to apply for a home loan soon, this may be a smart place to focus.
A longer credit history tends to help your score.
FICO looks at the age of your oldest account, your newest account, and the average age of all your accounts.
Closing a card does not erase its history right away. Accounts closed in good standing can stay on your report for up to 10 years.
Keeping older cards open can help your history over time. Still, some cards charge an annual fee or tempt you to overspend.
In those cases, closing the card may be the better choice.
A short credit history does not rule out a good score. Some people with newer credit still score well when the rest of their report is strong.
A secured credit card can help you get started. So can becoming an authorized user on a trusted family member's card.
Credit mix is the blend of account types on your report.
Installment loans have set payments over a set time. Auto loans, student loans, and mortgages are examples.
A credit card is revolving credit. It lets you borrow up to a limit, and your payment changes with your balance.
You do not need one of each type to have a good score. Opening new accounts just to improve your mix is usually not worth it.
Opening several new accounts in a short time can signal more risk. This is especially true if your credit history is short.
When you apply for credit, the lender pulls your report. This creates a hard inquiry.
Checking your own credit is a soft inquiry, and it does not affect your score.
A hard inquiry usually lowers a score by a few points. The effect often fades within a few months if you keep paying your bills on time.
Inquiries stay on your report for two years. However, FICO scores only count those from the last 12 months.
Scoring models often count mortgage inquiries made close together as a single inquiry. To be safe, try to keep your rate shopping within a short window, often about two weeks.
Credit card applications do not get this same treatment.
In the months before you buy a home, it may be wise to wait on new cards or loans you do not need. Each application can add a hard inquiry to your report.
Knowing the factors that impact your credit can help you plan your next steps with more confidence.
Check your reports from all three major credit bureaus. These are Experian, Equifax, and TransUnion.
If you spot an error, you have the right to dispute it.
Payment history and amounts owed make up about two thirds of a FICO Score. Paying on time and lowering your balances are often the most useful places to start.
Every buyer's credit and finances are different. When you feel ready, Miranda Mortgage Denver can talk through your credit.
We can review your options and help you understand what may fit your goals.
There is no set deadline, but earlier is usually better. Reviewing your reports before you apply can give you time to fix errors or pay down balances.
You have the right to dispute errors on your credit reports. Check your reports from all three bureaus, since each one may not show the same information.
You can ask how your credit may fit the loan options you are considering. You can also ask which factors, like payment history or balances, may be worth working on first.
A loan officer can help explain your options, but no review guarantees approval.
Each new application can add a hard inquiry. Several new accounts in a short time can also signal more risk.
Applying only for credit you need can help limit new inquiries.
Payment history carries the most weight, so paying every bill on time is often the best place to start. If you already pay on time, lowering your balances may be a helpful next step.
Smart Steps from Preapproval to Closing
This guide covers essential topics such as the comparison between owning and renting, various loan options, distinguishing between "prequalifying" and "preapproval," and more.
