Did you know that in order for you to get the best interest rate for a home loan, you’ll need a credit score in the range of 740 - 760 or more? Read below for the breakdown on what makes up your score on how you can achieve or maintain the perfect credit score!
1.Pay your bills on time
This makes up 35% of your credit score. Pay all your bills in full if possible. If you can’t, at the very least make your minimum payments. Anything less than a minimum payment will be considered a late payment and enough late payments will most likely cause your interest rate to spike from your original APR. Please keep in mind that late payments can stay on your credit report for up to 7 years and even if you file for bankruptcy, late payments stay on for 10 years! If your minimum is $25-$30, just mark your calendar or put those payments on auto!
2.Credit Utilization or the amount you owe play a critical component.
So besides paying on time, you will have to maintain a low credit utilization rate. This contributes to 30% of your FICO credit score. Credit utilization is your credit balance compared to the amount you owe. Basically, how much you have spent and how much you have left in your credit cards.
If you have a $1000 credit card and spend $100, you have a 10% utilization rate. If you have 5 credit cards with the $1000 on each of them and spend $1000 from one card, you still have a low utilization rate of 20%. Your utilization rate is calculate from the total number of credit balance you have and not just one card!
Ways you can help your credit utilization -
1. Ask for a credit line increase, but don’t use the extra amount.
2. Make credit card payments more than once a month. NEVER go above 30% of your utilization rate.
3. Spread your charges across multiple cards each month.
4. Pay off or pay down your credit card balances that have a higher credit utilization rate.
3. Maintain a good length of Credit History
This makes up 15% of your credit score. 3 credit bureaus use your average age of credit accounts not total age. So even if you have had a credit card for 2 years, if you open one up this year, your average credit history turns to just one year. This is one of the reasons why you don't want to close any accounts as that affects your credit history.
4. Limit new credit that’s being opened
With that said, you don't want to open up too many new accounts at once. That’s 10% of your credit score. New accounts lower your average account age. This one doesn't need too much explaining.
5. Types of credit that you have
This makes up 10% of your credit score. There are 3 main types of debt: 1. Installment Debt(car or student loan), revolving debt(credit cards), mortgage debt.
Your revolving debt is the most significant form of debt as those payments change over time and it really relies on how responsible you are with your credit cards.
However, if used properly and responsibly, all these forms of debt help you improve your credit score over time because it shows creditors how you use you manage your money with different types of accounts over time.
Side note: Mortgage Loan companies usually do a soft inquiry on the day of close of escrow. They are looking to see if you opened up more forms of deb and if you make a major purchase up until this day, they may reject your application. So stay away from any big purchases until after the settlement. I always recommend hiring a good loan officer as they will be your best friend during this time and tell you exactly what you need to do!
Hope this was helpful! I'll be sharing a testimonial from my son very soon to show you what it looks like to start building your score at an early age. BUT its never too late or too early to work on your credit. Use this post as a guide!