A surprising number of Americans do not know their own credit scores, despite the power these numbers have. In a recent survey on a financial literacy site, almost 30% of respondents admitted that they didn't know their credit scores. The issue was most prevalent among those under 30 and those making less than $30,000 a year. While personal finance and credit can be intimidating, understanding this area can make all the difference in the dream of owning a home. Learning a bit more about where credit scores come from and how consumers can enhance theirs is a great place to start.
For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.
Common Scoring Methods
Even among people who know their credit scores, the details of where those scores come from may be murky. The truth is that there are actually several credit scoring models, which include multiple scores created by each credit scoring agency.
All begin with people's credit reports. These documents are put together by the three major credit reporting agencies: Equifax, TransUnion and Experian. They record information about individuals' credit history which can include:
- When they open up lines of credit
- How much credit they have been extended
- How consistent they are about paying their bills
- What portion of their extended credit they use
- Whether there have been judgments against them involving their credit, such as bankruptcies or evictions.
Credit factors are all then weighted and used to create a three-digit credit score.
The most commonly used and well-known and commonly used score comes from FICO. However, there are other scores available. Experian, for instance, offers a VantageScore on their site, as well as a score known as a National Equivalency Score. These scores are all offered on relatively similar scale, with lows around 300 and highs of about 850.
How a Buyer Can Get Their Credit Score Home-Purchase Ready
According to FICO, they use five criteria extrapolated from an individual's credit report to create their score. These criteria are each weighted differently based on how much of an impact FICO thinks they'll have on future behavior with credit, and credit score can affect a household's ability to qualify for a mortgage. They are:
- Their payment history. This accounts for 35% of a credit score. In general, people who have paid their bills on time in the past can be counted on to continue doing it in the future.
- Their credit utilization. This is the percentage of their available credit that they are currently using. So, if they have $20,000 in credit line between all of their credit cards and are using $2,000 of that, they have a utilization of 10%. This counts for 30% of a score.
- The length of their credit history. This area accounts for 15% of a score. The longer someone has been using credit, the better their score is here.
- How recently they applied for new credit lines. This accounts for 10%. People who apply for a lot of credit at once may be having financial problems.
- How diverse their credit mix is. Lenders like to see that someone can manage both revolving and installment credit. This also counts for 10%.
Some credit components, such as a person's credit age, are not ones someone can have immediate control over. Others, such as paying on time every month, are well within everyone's grasp. By understanding what an individual can do to keep their credit good, they can increase their chances of winning a loan and achieving the goal of owning a Wall Township home.
For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.
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