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Financial Fitness: Top 5 Factors Affecting Your Credit Score

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Chelsea Breza-Berndt
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Your credit score is arguably the most crucial component of applying for a mortgage, car loan, credit card, or sometimes even other goods and services. Lenders use your credit score to help measure your overall financial health and determine the history you have with other creditors.

Credit scores typically range from 300-850 and lenders generally consider a score of over 700 to be good.Understanding the factors that can influence your score and how to manage and improve it over time can be challenging. Let’s explore some of the main factors that can impact your score.

1. The Scoring Model: Believe it or not, there is not just one type of credit score. Each of the three main credit bureaus (TransUnion, Equifax, and Experian) have numerous scoring models that creditors use to determine credit scores for various types of transactions. Your score may differ slightly depending on if you are applying for a mortgage, car loan, credit card, or utilizing a score provided through a personal credit monitoring service.2 

For example, if you apply for a car loan and the lender is pulling your credit score based on criteria for a car loan, that particular scoring model may weight late payments on prior vehicle loans more harshly than if you were trying to apply for a credit card. Since you have a history of paying your car loan late, there is more risk for the lender to give you another car loan. It’s important to understand that scores may differ sometimes, and that’s okay!
 
2. Derogatory Items & Late Payments: Simply paying your bills on time and avoiding having items go to collection will go a long way in preserving and improving your credit score. On-time payment history is the most heavily weighted component of a credit score.3 Late payments and collections can stay on your credit report for 7 years!4 

It can be helpful to set payment reminders to avoid missing small bills such as seldom-used credit cards. Even though it’s frustrating, if a dispute situation with a company arises (such as that cell phone company you are adamant you don’t owe that extra $50 to) it’s better to pay the amount in full and try to mitigate the situation later than risk having that item impact your credit. Small items such as this can quickly negatively impact your score.
 
3. Utilization Ratio: Another factor that is heavily weighted when determining your credit score is your revolving credit utilization ratio. This measures how much of your availability you are using when it comes to lines of credit such as credit cards. If you have a credit card with a $5,000 limit and are using $2,500 of that, you have a 50% utilization ratio. This helps creditors determine if you are keeping your spending in check relative to your limits and if your balances are all near their limit, it could signal financial stress.

A good guideline is to try to keep your credit card balances at less than 35% of their total limit.5 Balances are typically reported to the credit bureaus during the middle of the month when spending may be higher, so keep this in mind when thinking about your total credit utilization! If feasible, consider paying off larger purchases right away instead of waiting for the statement at the end of the month to help keep your credit usage down.
 
4. Length & Type of Credit History: The length and type of your credit history can impact your score as it shows lenders how long you have been managing your finances responsibly as well as what types of credit you have used. The longer you have good credit standing and build a history with an account, the better your score will be over time. Lenders also want to see that you are able to manage multiple types of credit such as credit cards, installment loans (think car loans or student debt, and mortgages. Having a positive history with different types of credit will bode well for your long-term score.3 

Begin building a credit history as soon as you are able, even if it’s just opening a small credit card and using it to pay for gas every month. Having a history when it comes time for a large purchase will help a lender be able to offer you a loan that is the best fit for you as some programs require that you have a credit history.
 
5. Inquiries: While not a major contributing factor to your overall score, being mindful of creditor inquiries can help maintain your credit.3 When you apply for any type of credit, lenders will place “inquiries” on your credit report to see your history and credit score. If there are many inquiries in a short period of time (for example, car shopping at many dealers), it can signal to lenders that you are actively searching out credit. This can potentially decrease your score as it indicates the possibility of more risk. 

If possible, try to limit lenders placing inquiries on your credit by only applying with a lender once you are ready to take out a loan instead of “shopping around”.


Understanding what can impact your score can be challenging, but maintaining a financially fit score will help simplify your mortgage process. At Compeer, we have compassionate lenders that will assist you every step of the way. Our lenders will build a relationship with you, listen to your needs, and find the product that will work best for your rural property. Even if you don’t have the credit to obtain your dream home today—we will provide guidance and resources for you to be better positioned in the future.


Sources: 
1. https://www.equifax.com/personal/education/credit/score/what-is-a-good-credit-score/
2. https://www.equifax.com/personal/education/credit/score/why-do-credit-scores-fluctuate/
3. https://www.myfico.com/credit-education/whats-in-your-credit-score/
4. https://blog.equifax.com/credit/faq-how-long-do-late-payments-stay-on-my-credit-report/
5. https://www.transunion.com/article/simple-steps-to-better-credit
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