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Understanding Your Credit Score

Tips for Building and Maintaining Healthy Credit

These five factors play a crucial role in determining your credit score. Understanding and working to improve them is a key part of getting your credit ready for homeownership.

Payment History (35%)

This is the most important factor. Lenders want to know if you’ve paid your past credit accounts on time. Late payments, defaults, bankruptcies, and collections can significantly lower your score. Maintaining a history of on-time payments helps demonstrate your reliability as a borrower.

Credit Utilization (30%)

Credit utilization refers to the ratio of your current credit card balances to your credit limits. A high balance compared to your credit limit can negatively impact your score. Keeping your credit utilization below 30% is a good goal for improving your score.

Length of Credit History (15%)

The length of time you’ve had credit accounts affects your score. A longer credit history shows lenders that you have experience managing credit. If you’re new to credit, you may want to focus on building a positive credit history before applying for a mortgage.

Types of Credit Used (10%)

This factor looks at the variety of credit accounts you have—such as credit cards, mortgages, and auto loans. A healthy mix of credit accounts can improve your score, but it’s not necessary to open multiple accounts just to boost your score. Quality over quantity is key.

New Credit Inquiries (10%)

Every time you apply for new credit, a “hard inquiry” is made, which can slightly lower your score. Frequent credit inquiries within a short period suggest a higher risk to lenders. It’s wise to limit credit applications, especially when you’re planning to apply for a mortgage.

Ready to Improve Your Credit?

By following these tips, you can take control of your credit score and move closer to your goal of homeownership. If you’re looking for more in-depth strategies to boost your score and clear up negative marks, check out our Credit Cleanup Guide, designed to help you achieve a cleaner, healthier credit report.

Credit Cleanup Guide

1. Borrow only what you can afford to repay
Taking on more debt than you can manage will hurt your credit score and make payments difficult.

2. Make all of your payments on time
Timely payments are the most important factor in your credit score. Set reminders or automate payments to stay on track.

3. Avoid excessive credit inquiries
Too many credit checks in a short period can lower your score. Be strategic with credit applications, especially when preparing for a mortgage.

4. Create an emergency fund
Having an emergency account to cover unexpected expenses can prevent you from relying on credit and missing payments.

5. Review your credit report regularly
Check your credit report at least once a year to spot errors. Dispute any inaccuracies to ensure your score isn’t unfairly impacted.

6. Keep a low credit utilization ratio
Aim for a credit utilization of less than 30%. The lower your balance relative to your credit limit, the better it is for your score.

7. Avoid opening new store credit cards
Store credit cards might offer instant savings, but they can lower your score and increase your financial stress in the long run. A small discount now isn’t worth the potential cost on a larger loan.

8. Don’t shy away from using credit
To build a score, you need to use credit. Just be sure to use it responsibly, paying off your balances in full each month when possible.

9. Maintain a mix of credit types
A combination of revolving (credit cards), installment (auto loans, mortgages), and secured accounts can positively influence your score. However, don’t open unnecessary accounts just for variety.