To keep you on top of your credit while you prepare to refinance or purchase a home, you should be aware of the five factors that determine credit score.
- Payment history is a large factor and the one that first comes to mind when thinking about credit scores. Your payment history is the number one thing that will be evaluated for a credit score which determines whether or not you are capable of repaying debt.
- Outstanding debt is almost as heavily weighted in the credit score calculation as payment history. Outstanding debt is not only based on how many credit cards and how much debt you have, but also whether or not you’ve reached your credit limits. For example, person “A” has maxed out a $500 limit credit card. Person “B” has a $20,000 balance with a $50,000 limit. Though person “B” physically has more financial debt, person “A” will have a lower credit score based on his/her ability to manage available credit.
- Duration of credit, or the amount of time you’ve had a credit card or loan, is also an element in determining your credit score. Keeping your accounts open and active is important in building credit. Most importantly, closing credit card accounts can adversely affect your credit score because it shortens the length of your credit history.
- Frequent inquiries for new credit card accounts in a short period of time can also have a negative impact on your credit score.
- Type of credit is the final main factor in determining a credit score. While all credit may seem the same, a the use of a store credit card (i.e. Macy’s) is weighted differently than installment debt (student loan, vehicle loan or mortgage) because an installment loan has a defined end date, unlike a credit card.