credit_scoreRecently we worked on debunking many of the myths that exist surrounding credit scores.  Optimal credit scores are an essential component in mortgage applications.  A strong credit score increases the options you have as a potential home buyer in securing your mortgage.  Applicants with high scores see lenders offering fast approval at better rates, but what if your credit rating is less than stellar?  People with credit scores below 620 could be subject to higher borrowing rates and may have additional challenges in qualifying for a mortgage from many lenders.

By understanding the five different components that make up your credit score you can better identify which areas of your credit score may be hindering your chances of securing the loan you need.

  1. Previous payment history (approx. 35% of score)
    Your track record of paying your credit accounts on time is the most heavily weighted attribute. Events such as late payments, collections, judgments, liens, foreclosures, bankruptcies, and wage attachments are part of this category and are considered quite serious. More recent events and large amounts will affect your score more than older events and small amounts.
  2. Current level of indebtedness (approx. 30% of score)
    This portion of the score considers whether you are overextended or not. Too many credit cards or keeping your accounts at or near their maximum limit can signal that you don’t manage credit responsibly, and that you may have trouble making payments in the future.
  3. Length of credit history (approx. 15% of score)
    The longer you have had credit in good standing the lower the risk indicators. This score considers the age of your oldest account and an average age of all of your accounts. New accounts will therefore lower your average account age.
  4. Pursuit of new credit (approx. 10% of score)
    Opening several credit accounts in a short period of time is a risk indicator. The number of enquiries done on your behalf can also have an effect. However credit scores try to differentiate between rate shopping for a single loan and searching for many new credit accounts. This can help avoid collections, which has a negative impact on your credit score for a long period of time.
  5. Types of credit available (approx. 10% of score)
    This attribute considers the mix of credit accounts you have: credit cards, retail accounts, installment loans, accounts with finance companies, and your mortgage. The goal is to determine if you have a healthy mix of credit. For instance, having a car loan, mortgage and credit card is more positive than a concentration of debt in only credit cards.

Remember even if your credit score is below 620 there are many ways that you can improve this and make yourself more desirable to potential lenders.  The companies that hold your credit and loan accounts report monthly transactions to credit bureaus.  This means that you can begin to improve your credit scores each month provided you perform the right credit behaviours.