Preparing for homeownership

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Your credit score serves as a numerical summary of the information contained in your credit report and is designed to assess your credit risk – specifically, the likelihood of you repaying borrowed funds. The widely used scoring model is the FICO score, developed and issued by Fair Isaac Corporation, ranging from 300 to 850. Generally, individuals with higher scores find it easier to obtain credit and secure more favorable interest rates.

When it comes to mortgages, many lenders typically require a minimum score of 680. However, those with scores in the mid-700s and above often enjoy the most favorable interest rates. On the other hand, if your score falls below 680, you may only qualify for sub-prime loans, which tend to come with high interest rates or less favorable loan terms. In some cases, obtaining any loan may prove challenging.

It's important to note that credit score requirements can vary among lenders. It is always advisable to verify the minimum credit score requirements with your specific lender.

The following factors are used to calculate your FICO score:

• Payment history (35%): Your score is influenced by your track record of making payments on time. Timely payments positively impact your score, while late payments can have a negative effect. The frequency, recency, and severity of delinquencies play a role in determining the impact on your score. Collection accounts and legal actions have a significant adverse effect.

• Amounts owed (30%): This factor, known as the utilization ratio, compares your balances to credit limits on revolving accounts. It also considers the current balance in relation to the original balance on installment accounts. Carrying substantial balances on personal loans and revolving debt, particularly when close to credit limits, can lower your score. A recommended benchmark is to keep your utilization ratio below 50% to maintain a good credit score.

• Length of credit history (15%): The average age of your open accounts is taken into account. Having longer-standing accounts positively influences your score.

• New credit (10%): This factor examines the number and proportion of recently opened accounts, as well as the number of inquiries made. Accessing your own credit report does not harm your score, and inquiries for pre-approval offers are also considered harmless.

• Type of credit used (10%): Having a mix of different accounts, such as both revolving (e.g., credit cards, lines of credit) and installment (e.g., personal loans, car loans, mortgages), can boost your score. This variety demonstrates your ability to handle different types of debt responsibly.

Your Equifax, Experian, and TransUnion credit reports do not necessarily contain the same information. Hence, your FICO score from each bureau may differ. When you apply for credit, the creditor may only check one of your scores or check all three and average them or take the lowest or middle score. If you are applying for a mortgage with a co-borrower, both of your credit scores will be taken into account during the approval process.