Lenders view your credit history as the best predictor of your credit worthiness. Your credit history is expressed as a 3-digit number called a credit score. Credit scores range from 300 to 850. The higher your credit score, the easier time you will have getting a mortgage and the better interest rate. Anything over 720 is considered good; 750 is excellent.
There are five factors that influence your credit score. These include:
- Payment history (35%);
- Credit utilization (30%);
- Length of credit history (15%);
- New credit accounts (10%);
- Credit mix (10 percent).
In other words, paying your bills on time and using less than 30 percent of your available credit accounts for two-thirds of your credit score. The other third is made up of your credit accounts. If planning to purchase a home in the near future, it is best not to close longtime existing accounts or open new ones, and show that you can handle a good mix of credit, both installment and revolving credit.
If you do all this, your chances of achieving and maintaining a good credit score are very high. And a good credit score will give you clout when shopping for a mortgage. The higher your score, the more lenders will fight for your business, and the better rate you will receive. In a time of rising rates, getting the lowest rate possible can mean the difference in obtaining an affordable mortgage and buying the home of your dreams.