Understanding your FICO Credit Score with a few pointers brought to your from SOFI. If your score is low, your chances of qualifying for a home loan are low and your finance rate goes sky high.
Make your credit score shine by understanding a few key things that are affecting your score.
The FICO scoring model sources data from credit bureaus to evaluate your financial standing — the result of which is leveraged by lenders to determine your candidacy for certain loan terms.
Elements used in the FICO scoring model include payment history, credit utilization (amount owed), length of credit history, credit mix, and new credit.
Here's what SOFI's concise explanation is:
- ‘Payment history’ looks at how reliable you are when it comes to paying bills on time. ‘Amount owed’ is how much debt you’re currently carrying — and more specifically, ‘credit utilization’ focuses on the amount of credit you’re using relative to the amount of credit available to you.
- Lenders generally like to see a credit utilization ratio of 30% or lower.
- ‘Length of credit history’ looks at the age of your newest and oldest accounts—the longer the better.
- ‘Credit mix’ evaluates the type of debt you have — a desirable mix is a combination of revolving debt (i.e. lines of credit) and installment debt (i.e. loans with fixed repayment terms).
- ‘New credit’ looks at accounts you’ve opened recently.
Speak with your mortgage lender to see where your credit rating stands and what you can do to clean it up. Doing this well before shopping for your next home will give you time to create a good score, which will save you thousands of dollars when it comes time to purchase your home.