The 5 Components of Credit Scores - and What to Fix First

Your credit score has a major impact on whether or not you qualify for a mortgage and how good a deal you can get on it. So understanding and improving your score is a vital part of preparing for a mortgage. If you're like most Americans, though, you may not know much about how your own credit score works. To help you make it the best it can be, here are five components of your credit score and what you can do about each.

Your payment history is the biggest factor in most credit score calculations. This is the pattern you've established of paying on time, every time, or it could consist of paying late and missing payments. It's easy to see why payment history would matter most to mortgage lenders as they see this as indicating whether or not you're more likely to miss their payments.

You may not be able to do much to fix missed payments in your past. However, if there are errors in this part of your score and you can demonstrate it, you should dispute such errors. And, of course, make sure you're making those payments on time from now on. As old missed payments age off your report, you may see a natural increase in your score.

The second major factor in a credit score is how much debt you're using. This is reported as a percentage of available credit - both as a total number and for each account. If you currently owe $500 on a card with a $1,000 limit, you're only using 50% of your available credit. This then feeds into your overall usage across all sources of revolving credit, such as credit cards and home equity lines of credit.

If your debt utilization is higher than about 30%, you may start being considered overextended on debt. The good news is that this is probably the factor you have the most ability to change before applying for a loan. Focus on paying down or off revolving debt - rather than installment loans - to lower this percentage.

How long have you had various forms of credit? Few Americans think about this much, but it does factor into your score. What makes your length of credit history good? Hold credit as a whole for many years, as well as having individual open accounts with long years of history behind them.

While you cannot change your history overnight, you can take two steps. First, don't close old, unused accounts until they no longer appear on your history. Second, avoid opening a lot of new accounts to maintain a longer average time.

Your score can also be improved by a healthy mix of the two main types of credit: revolving and installment. Installment loans are things like mortgages, vehicle loans, and personal loans. Revolving credit is generally credit cards and lines of credit. You can affect your mix by opening different types of accounts if needed. This factor, though, doesn't have a high impact on your score, so focus on the above areas first.

Finally, your score is affected by how many new sources of credit you've taken out. Taking out too many new forms of possible debt could spell trouble for your ability to pay everyone back. So it's best to avoid applying for multiple new accounts before applying for a mortgage. However, again, this is a low impact element, so focus in bigger issues first if they exist.

Want to know more about the ideal credit score, utilization rates, and history for a mortgage you plan to apply for? Start by talking with the lending pros at Cornerstone Residential Mortgage. We will work with you to identify ways you can ensure you qualify for the best possible mortgage when you're ready to apply. Call today to learn more.