Your credit score is one of the most important measures of your financial health. In a quick glance, your score tells lenders how responsibly you use credit and your likelihood of repaying new debt. Your credit score is checked for a variety of reasons, including home loans, property or auto rentals, a new job, credit cards, insurance, and cell phone service.
How Credit Scores Are Calculated
Credit scores are calculated based on five main factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Payment history is the single most influential factor — consistently paying bills on time is the most powerful thing you can do to build and maintain a strong score.
What Score Do You Need for a Mortgage?
For a conventional mortgage, most lenders require a minimum credit score of 620, though scores of 740 or higher will qualify you for the best interest rates. FHA loans allow scores as low as 580 with a 3.5% down payment, or as low as 500 with a 10% down payment. VA loans have no minimum score requirement set by the government, though individual lenders may have their own minimums.
How to Improve Your Score
Pay all bills on time — even one missed payment can have a significant negative impact. Keep your credit card balances below 30% of your available credit limit (lower is better). Avoid opening multiple new credit accounts in a short period. Don’t close old accounts, as the length of your credit history matters. Dispute any errors on your credit report promptly.
Check Your Report Before Buying
Before you begin the homebuying process, pull your credit reports from all three major bureaus (Equifax, Experian, and TransUnion) and review them for errors. You’re entitled to one free report from each bureau annually at AnnualCreditReport.com. Correcting errors can take time, so start the process well before you plan to apply for a mortgage.
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