Understanding Credit

How Credit Scores Work

Credit is one of the most important components in the mortgage approval process. Lenders look at a borrower’s credit score, number of open accounts, payment history, type of credit borrowed and a series of other factors when determining the level of risk in each lending scenario. Down payment requirements, loan programs, flexibility on income, and even interest rates can be impacted by a slight bump in a credit score.

Key Factors that Affect Your Score

Once credit has been established and maintained, credit scores are based on five factors to varying degrees: payment history, amounts owed, length of history, credit usage and new accounts.

Payment History

It’s essential to pay credit bills on time. Every late bill, collection, judgment, or bankruptcy significantly drops your score.

Amounts Owed

It’s a good rule-of-thumb to borrow 40% or less of your available credit balances – going over hurts your score.

Length of History

Easy rule-of-thumb: the longer your accounts are open, the more positive impact it will have on your overall credit score.

Credit Usage

Having other debt like open credit cards shows creditors that you have experience responsibly borrowing money.

Credit Inquiries

It’s a red flag to have multiple credit reports pulled in a short time – even if you’re rate shopping.

New Accounts

Opening new accounts over a short period generally indicates greater risk – especially for those without much credit history.

Establishing Credit

Several factors can be used to establish credit initially, including bank accounts, employment history, residence history, and utility bills. Credit may be initially obtained through a bank, where a credit card is linked to money deposited in the bank.

Understanding Credit FAQs

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