It’s National Credit Education Month. Do you know the importance of your credit score? Your credit score makes a difference when you borrow money in the form of a loan for major purchases, including a home or a car, making it important to know and understand your credit score.
Essentially, the better your score, the lower the cost of your loan. There are other variables that affect the amount and interest rate of your loan, like your down payment, but your credit also plays a role.
Credit score basics
Credit scores range from 300 to 850, with very good credit beginning at about 740. If your credit is considered good to excellent, you’ll benefit from a lower interest rate. If your credit isn’t where you want it to be, don’t worry. There are steps you can take to increase your score and get you a better rate.
Key elements that affect your credit score
While you can boost your credit score in the short-term, working towards a consistently high score in the long-term will have lasting benefits. Keep track of the most important factors that affect your score so you can manage them to work in your favor. There are five main items that influence your score:
- Payment history
- Credit usage
- Age of credit accounts
- Credit mix
- New credit inquiries
Optimizing your credit score and usage
The best way to build your credit score is to pay your bills on time, avoid using the maximum amount of credit available to you, and only open new accounts or make major credit purchases if necessary. Each of these things will play a role in building and increasing your credit score.
For the quickest beneficial impact, start paying your debt off on a consistent basis. If you have any high balances, that’s okay. Just try not to add to them if at all possible. Remember that many credit cards that offer low interest or zero interest introductory rates convert to extremely high rates after their initial grace period. Consistently paying off debt and maintaining a lower balance can help you control the interest.
It’s also important to note that credit use is not inherently bad. Used properly, it can be an excellent tool to build your credit. For example, use a credit card to pay bills and then pay off the balance in its entirety every month. Alternatively, if you do use your credit cards, try not to exceed 20% of their maximum credit limit as this will lower your credit score.
As far as credit inquiries are concerned, be sure to know the difference between hard and soft credit inquiries. Soft inquiries, like checking your own credit, don’t affect your score. However, hard inquiries, like those involved in a mortgage application, can have a negative effect if you source them multiple times in a short period of time.
Speak with your First Centennial Mortgage loan officer about your credit score and what type of home loan you may qualify for. We look forward to assisting you with your home loan needs, whether you are a first-time buyer or repeat home buyer.