Credit Scores: How They Work & How You Can Improve It

Ahh, the good old credit score. It’s the center of many of our financial decisions, but do you really know how it works? Especially when it comes to a mortgage, having a good credit score can be a deciding factor in our ability to purchase a home. And it’s important to always work towards improving it, as it sets the stage for other big life purchases.

A credit score is a number between 300-850 that serves as a baseline for someone’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is determined by your credit history, which includes the number of open accounts, debt, and repayment history you have. Having a good credit score symbolizes that you’re smart with your money, and would be able to repay loans on time.  

Think of them like grades you’d receive in school. Somewhere between 90-100 would be an A, 80-89 would be a B, etc. Credit scores have similar ranges, and those ranges determine how trustworthy and responsible you are to lenders. People with credit scores below 640 are typically considered to be ‘subprime borrowers.’ Lenders can charge a higher interest on subprime mortgages to compensate themselves for carrying more risk. A good credit score would constitute 700 or above, and you’ll most likely receive a lower interest rate. So moral of the story is; keep your credit high, because it will pay off in the long run!

There are three big credit reporting agencies in the U.S, and they report on and update on your credit history. Information might be collected differently at each, but there are five main factors that come into play when evaluating someone’s score: payment history, total amount owed, length of credit history, and types of credit. Payment history accounts for 35% of a credit score, and the length of credit history counts for 15%, and longer credit histories are less risky since there is more data to determine payment history. Total amount owed counts for 30%, and types of credit used counts for 10%.

Information is routinely updated on your credit report, and your credit score can change based on this new information. Improving your credit score is fairly simple: pay your bills on time, up your credit line, and don’t close a credit card account. If you feel like you’re doing better with paying bills on time and still not seeing the payoff on your credit score, it’s because it takes about six months of on-time payments to start seeing a difference. When it comes to upping your credit line, see if you can call and inquire about a credit increase. As long as you’re in good standing, you should have no problem getting an increase in your credit limit. If you decide you don’t want to use a credit card anymore, we recommend just not using it vs. closing the account.

If you’re looking for a lower rate on your current mortgage or looking to consolidate debt, you’ve come to the right place! Ken Venick has over 30 years of experience in the mortgage loan business and can put you or your client in the right mortgage loan product for their unique needs. Contact us online today or give us a call at 443-471-4310!

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