Lenders look at your credit score and credit report as important factors in deciding whether you can obtain a mortgage loan.
A credit report is a history of your credit with creditors, such as banks, mortgage companies, credit card companies and retail stores. It would not contain information about your checking or savings account, purchases made with cash, or business accounts unless you are personally liable.
In order to have a credit score, you must have credit that is being used routinely. It is not a requirement to have a credit score to obtain a mortgage, but it does simplify the process significantly for you.
Know which factors determine your credit score
First, it’s helpful to know some of the factors that the major credit bureaus – such as Equifax, Experian and TransUnion – look at when calculating a credit score. A credit scoring system awards points for various factors in your loan repayment and credit history. The total of these points is your credit score, which lenders consider when determining the risk and interest rate on a loan.
Credit bureaus consider these factors when calculating your credit score:
Do you pay your bills on time?
If you have paid late, had an account sent to a collection agency or have declared bankruptcy, this will have a negative impact on your credit score.
What is your outstanding debt?
Many scoring models will compare the amount of debt you have compared to your credit limits. If the amount you owe is close to your limit, it is likely to have a negative impact. So if you have a lot of credit cards, and the balance on all are close to maxed out, this can have a negative effect on your score.
How long is your credit history?
A short credit history can have a negative impact on your credit score. However, you may offset this by making payments on time (for example: rent, utilities, credit cards) and maintaining low credit balances.
Have you applied for credit recently?
Applying for too many accounts within a short time period can have a negative effect on your credit score.
What kinds of credit are you using?
Many credit scoring models will consider the number and type of credit accounts you are using. Too many finance company accounts or too many credit cards may hurt your score.
Credit score breakdown
In general, this is the breakdown of how the credit factors impact your credit score:
- 35% of your credit score is based on payment history
- 30% takes into account factors on balances, including: amount that is owed on each open account, how many accounts, balance ratio to the credit opened, balance compared to the original loan amount
- 15% is based on the length of your credit history
- 10% is based on the amount of new credit
- 10% is based on a healthy mix of credit
Review your credit report annually
Your credit history is all contained in credit reports at the major credit bureaus, so it’s important to review these reports to ensure accuracy. You are entitled to a free copy of your credit report from each bureau every twelve months. You can start that process at annualcreditreport.com.
You can request these from all three bureaus at once, or stagger your credit report requests across the year so you can better monitor for ongoing accuracy.
When requesting your free credit report, you will be asked to provide the following information: name, address, Social Security number and date of birth. If you have moved within the past two years, you will likely be asked to provide a previous address. For security purposes, the company may also ask you for a secret question that no one else would know.
Requesting a copy of your credit report is just the first step. You will also want to review it for accuracy, and report or dispute any inaccuracies. Credit bureaus and the organization providing the information to them are both responsible for correcting errors found in your credit report.