Do you know how your credit score is calculated?

Do you remember the dread of handing your report card to your parents when you knew it wouldn’t be good? You may have sat there hoping your final grade would magically improve before they opened it up. But, sadly, it didn’t, and you were left to face the consequences of your poor study habits.

Applying for mortgage financing when your credit history is a little shaky can bring up those same feelings that a lousy report card did. Just like when your parents opened the report card envelope, you may have your fingers crossed under the table, wishing and hoping it isn’t as bad as you think when your mortgage loan advisor pulls up your credit report. But no magic button can instantly improve your credit history. Instead, it’s up to you to do the work to improve your credit.

How is your credit score calculated?
Before improving your credit, you must know how your credit or FICO® score is calculated. According to Realtor.com, credit scores range from 300 to 850 and are calculated based on several factors, including:

• Payment History: Your history of debt payments determines at least 35% of your credit rating. If you regularly make your monthly payments, your score will rise, but if you go more than 30 days without making a payment, you can expect a significant drop.
• Debt-to-credit utilization: At least 30% of your score is determined by how much debt you have accumulated compared to the credit limits on your accounts. A good rule of thumb for maintaining a good debt-to-credit utilization for your credit score is never to go beyond 30% of your credit limit.
• Length of credit history: How long you have used credit is important to lenders, so it accounts for at least 15% of your score. Lenders value long-term credit usage, so maintain some accounts you regularly pay off.
• Credit mix: It’s also important to diversify your credit sources for your report, which accounts for 10% of your score. Having different types of credit, like credit cards, car loans, and home loans, is beneficial.
• New credit: New credit sources make up 10% of your score, so it’s best to wait until after securing your mortgage to apply for new credit.

Checking and improving your credit score
There are many ways to check your credit score, from free online tools to more detailed credit reports. You can also check with your credit card company. We advise you to thoroughly check your credit rating before applying for a mortgage. If your rating is not where you’d like it to be, improve your score by paying down debt or working with a debt counselor.

Ask about low-credit mortgage options
Even though your credit rating is important for determining your mortgage financing, it’s not the only factor lenders consider. So, if you have a poor credit history, there are still options available to help you become a homeowner, especially if you’re working to improve your credit. At PRMI, your loan advisor can discuss your financing options and advise you on which ones may be best for your needs. Make an appointment with your local advisor today to see what options are available for you!

*FICO® is a registered mark of Fair Isaac Corporation.