Jul
20

Buying your dream home, first understand your credit report

Building credit can be difficult to master. Understanding your credit report can be even harder.

What is considered in a credit score, anyway? Well, between FICO and VantageScore, there is no single way to calculate your credit score. These top models are similar but scored slightly differently.

FICO is the most common credit ranking for users.  This model has a range from 300 to 850 and is categorized into five major sections:

  • Payment History (35%): Why does this category determine so much of your credit score? According to Barry Paperno, a credit scoring expert, “FICO’s research has shown that a person’s payment track record tends to be the strongest predictor of the likelihood that the individual will pay all debts as agreed in the future.” In other words, borrowers with a history of paying on time tend to have solid credit scores.
  • Credit Utilization (30%): Experian, a major credit reporting company in the U.S., recommends borrowers keep their total credit utilization rate below 30%. Your credit balance should be far below your total limit. This shows credit scorers you’re underspending and properly managing your credit responsibilities.
  • Length of Credit History (15%): This section is simply the amount of time each of your credit accounts have been open. A longer history of accruing credit is a better indicator of your financial behavior.
  • Credit Mix (10%): Per MyFico.com, Credit Mix is simply a culmination of the different types of credit you have. Meaning, FICO considers different accounts (credit cards, auto loans, student loans) and assesses how you handled them.
  • New credit and recently opened accounts (10%): Simply put, don’t open a lot of new credit accounts over a short period of time. This will negatively impact your FICO score.

The VantageScore 3.0 model varies just a bit from FICO. Developed by the major credit reporting bureaus, this model is used by a lot of free credit report sites. Payment history (41%) and credit utilization (20%) are also categories considered in this model. Yet, there are other factors to consider using this credit ranking.

  • Duration and Type of Credit (20%): Lenders prefer to see long-term and established lines of credit. Having different types of credit (credit cards, auto loans, etc.) is also considered in this section. This category is similar to FICO’s Credit Mix.
  • Recent Behavior (11%): This section is similar to FICO’s new credit section. Scorers consider new credit accounts like personal loans or credit cards.
  • Total Balances (6%): Per CreditKarma, this category refers to the total amount of recently reported balances on your credit accounts.
  • Available credit (2%): Try to only take out credit that you need. This will help boost your overall credit score.

As your personal real estate agent, I’m always here to help. If you have any further questions about how lenders view your credit score, feel free to reach out to me at 775-309-7979.

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