If you are among the many who are interested in purchasing your first home, you may be wondering about your credit score. We can help you understand your credit score a little bit better!
What is a credit score and how is it determined?
Creditors use a statistical formula to review the data in your files and compare it to credit performance of consumers with similar profiles. A credit scoring system awards points for each factor. The total of your points determines your credit score and gives lenders a prediction of how you can repay your loan.
The following factors are used to determine your credit score:
- Do you pay your bills on time? If you have paid late, had an account sent to a collection agency, or have declared bankruptcy, this will have a negative impact on your credit score.
- What is your outstanding debt? Many scoring models compare the amount of debt you have with your credit limits. If the amount you owe is close to your limit, it is likely to have a negative impact.
- How long is your credit history? A short history can have a negative impact, but can be offset by on-time payments and low balances.
- Have you applied for new credit recently? Applying for too many accounts within a short time period can negatively affect your score.
- How many and what types of credit accounts do you have? Many scoring models consider the number and type of accounts you have. A mix of installment loans and credit cards may improve your score. Too many finance company accounts or too many credit cards will likely hurt your score.
How can I get a free credit report?
Your credit report contains personal information about where you live, how you pay your bills, whether you have been sued, arrested, or filed for bankruptcy. This information is used to make decisions when you apply for credit, insurance, employment, or a lease.
It's important to review your credit report for accuracy. The three consumer credit reporting bureaus, Equifax, Experian, and TransUnion, are each required to provide a free copy of your credit report once every 12 months at your request. Many financial advisors suggest that you stagger your requests over those 12 months so that you can monitor for accuracy and changes.
You can order your credit report by visiting www.annualcreditreport.com. There is no need to contact the companies individually because they use the same service to provide the free reports.
When requesting your free credit report, you will be asked to provide the following:
- Social Security number
- date of birth
If you have moved within the past two years, you may be asked to provide your previous address. For security purposes, the company may also ask you a “secret” question that no one else would know.
Once you get your free report, let’s talk! We'd love to help you understand this part of purchasing your new home!