Everything matters when applying for a loan, from your income to your employment history and credit score. These factors help banks and financial institutions determine your loan eligibility and approval. However, some factors impact your eligibility more than others.
For example, your credit score is a key factor affecting loan decisions by a lender. Therefore, this article discusses the credit score and how it impacts home loan eligibility. You’ll also learn the factors affecting your credit scores and how to improve yours. Keep reading to learn more!
Understanding the Credit Score
A credit score is a numerical representation of your creditworthiness. It is usually a three-digit number ranging from 300 to 900. The higher the number, the better your credit score. 900 represents a perfect score, while 300 is the lowest score.
Though a simple number, your credit score highlights your history of financial stability and credit management. Credit bureaus usually calculate and assign these scores using many factors. These factors range from the types of credit accounts you hold to your repayment history. Many credit scoring models exist, but the FICO score is the most common, followed by the VantageScore. We’ll be discussing the FICO score in this article.
Factors Influencing Credit Scores
The higher your credit score, the more credit eligibility you enjoy with better conditions. While many factors influence your credit score, you can control all of them. This section outlines the five factors influencing credit scores and how much each contributes to your score.
1. Payment History
Your loan repayment history is the primary factor affecting your credit score. It contributes 35% to your credit score. When considering this factor, credit bureaus check how early you paid off your previous loans. Early loan repayment, even for buy now pay later, leads to higher credit scores.
If you were ever late, they also measured how late your repayment was. The bureau will also consider your frequency of missed payments. Your score here will greatly reduce if any of your loans lead to a public record, such as a charge-off, foreclosure, or lawsuit.
2. Amounts Owed and Credit Utilization
The amount you owe and the ratio of your credit used is the next most important factor affecting your score. It contributes 30% to your score. Here, the bureau checks how much you’ve used compared to your available balance. The less you use, the higher your score.
This factor also measures your total credit amount and how much you owe on specific credit accounts. You’ll get a higher score if you have diverse credit accounts and manage all of them well.
3. Length of Credit History
Lenders show interest in how long you’ve been using credit. They believe that experienced creditors handle debts better. That is why your length of credit history is an important factor influencing your credit score. It contributes 15% to your score.
Here, the bureau calculates the age of your oldest account and the average age of all your accounts. That is why experts recommend leaving your credit account open, even when not in use. Your account’s age only greatly improves your credit score.
4. Types of Credits Used
The versatility of your credit also influences your score. It contributes 10% to credit scores in the FICO score model. Here, the bureau checks your various categories of accounts for evaluation.
You’ll have a higher score if you have a mix of different types of credit, like mortgages, credit cards, and installment loans. However, this contributes only a small percentage to your score, so don’t open new accounts to boost your score.
5. New Credit
The bureau also analyzes the amount of new credit accounts you have. New credit contributes 10% to your credit score. Lenders consider it risky to open multiple new credit accounts within a specified period.
Importance of Credit Scores in Home Loans
While you can get loans for bad credit in Florida and other US states, a good credit score offers more benefits. These may even allow you to explore Hollywood housing options. Below are some advantages you enjoy with a good credit score:
- Loan eligibility
- Higher interest
- Faster loan processing
- Increased loan amounts
- Better loan terms
Endnote
Your credit score greatly impacts your loan eligibility and approval. A good credit score makes you more eligible and earn better interest rates and loan terms. You’ve also seen the five factors that affect your credit scores, from your payment history to the types of credit used. Use the insight on these factors to build a good credit score and qualify for the best home loan deals.
