Lenders want to lend to you just as much as you want to buy. One of the main criteria when evaluating buyer strength is with your credit score. This somewhat mysterious number holds the key in determining what programs you are approved for and what interest rate you pay on those loans. The common misconception regarding credit score is that if you are on time with all your bills your score will be strong. While this is certainly important it is far from the only contributing factor. If you don’t know exactly what comprises your score you may be disappointed when you apply for a loan.
There are three main reporting agencies (Equifax, Experian & Transunion) that compute your score anywhere from around 300 to 850. The higher the score the more options you will have available. The scores will be pretty much the same among all three companies but there can be differences in an account or two that is reported. The main factor in computing your score is still the timeliness of monthly payments. Other factors can have a real impact but if you are late on any of your accounts, especially a mortgage or car payment your score will drop every month that you are delinquent. Lenders and credit reporting agencies look at all your past payment history so a late credit card payment eight months ago will still impact your credit score.
Aside from payment history the next biggest area that lowers your score is the amount of available balance on each account. Paying on time if you are maxed out on every account will not be enough to save your score. Credit agencies want to see that you have available credit in the event that something unexpected happens. By maxing out all of your accounts you don’t have much margin for error and this is considered a huge credit risk. Knowing this you can look to transfer or consolidate balances to free up credit with certain accounts. The more cards you have a high balance on the lower your score will be.
Other important factors are the number of inquiries in the past twelve months, the amount of high balances per account and time since the last account was opened. If you are constantly applying for cards, whether you open them or not, this is viewed in a negative light. Increased applications are often an indicator that you are looking for credit and have been rejected at multiple places. The same goes if you opened three new credit cards in the last few months. The more of a risk you are perceived to be the lower your score will drop.
The best way to stay up to date with your score is to obtain a copy every month and see where you stand. Not only will you know your score but you can see if there were any new accounts opened or any items that should be removed. Without a strong credit score your options will be limited as to what you can do regardless of income or assets.