Credit scores are an important part of your homebuying process. Unfortunately, there are lots of myths and misconceptions about them. Here are some of the most-asked questions about them and why they matter.
What Goes Into My Credit Score?
Your score is made up of five factors. The most important one is your payment history, which makes up 35% of your score, followed closely by your debt load, which makes up 30%. The final three are length of credit history (15%), your mix of installment and revolving credit accounts (10%), and new credit (10%).
How Long Does Bad Information Affect My Credit?
If you had a late payment or a collection, it won’t follow you forever. Credit scores are primarily driven by your credit behavior from the last six months. If you start paying your bills on time, your score will begin improving significantly at the six-month mark. After two years, the credit misstep will be barely impacting your credit score.
How Often Can I Check My Credit?
Some consumers worry that if they pull their credit frequently, the inquiries will decrease their credit score. Not so. If you pull your credit from a place like www.annualcreditreport.com, it counts as a “soft inquiry” that doesn’t affect your credit. However, if you let too many credit card companies or other creditors pull your credit, those inquiries will affect your score.
Will Letting Multiple Credit Pulls for a Mortgage Hurt My Score?
The answer to this is probably not. There’s a feature built into the numeric formula that calculates your score to account for that. If you let five lenders pull your credit, you won’t get dinged five times, because obviously you aren’t buying five homes! If these inquiries are made within 45 days, they will only count as one inquiry. Keep in mind you will see all the inquiries on your credit report, but they will just count against your credit score once.
Should I Close My Credit Cards to Increase My Score?
Sometimes this will decrease your score, so the answer is no. Closing credit cards may increase your debt utilization ratio (your total credit limit divided by your total balances), which may negatively affect your credit score. Plus, your old credit cards are giving you extra years’ worth of credit history, which is helping increase your score. Use your credit cards a few times a year, even if you pay them off every month.
Can I Buy a Home With Bad Credit?
It’s possible. Home loans with bad credit are more challenging to secure, but they are out there. There are several factors that go into the decision, such as just how low your credit score is, how much of a down payment you have, and the interest rate you’re willing to accept.
