If you’re looking at jumping into the Leduc real estate market, you have probably checked out your credit report. Have you ever looked at your credit and wondered how they go about calculating your credit score? Well, that figure is calculated by weighing different areas of your financial history. This is all done through complex algorithms now, but we can still break it down to understand it better.
Each of these five areas has a different weighted amount:
- payment history
- amount owed
- length of credit history
- new credit
- types of credit
These things effects your credit score most
Payment history is worth 35% of your credit score. This includes things like bankruptcies, late payments, past due accounts, and judgments. It represents the largest proportion of your credit score, so making your payments on time is extremely important for building up your credit score before buying a house in Leduc.
The amounts owed on your accounts comprise 30% of your credit score. This takes into consideration the amount available – what’s left after your balance – on each of your credit cards, so if you are constantly using your cards and not paying them off, that will lower the score. Kimm Nguyen, a mortgage broker I met in the course of selling Leduc real estate, [AT1] mentioned that the algorithms consider using the cards to be a good thing; it will help increase your score if you use a card and pay it off right away. It is actually a good strategy to increase your score quicker…but you have to keep the balance low or paid off.
Length of credit history is 15% of your score. Time since the accounts were opened and time since last account activity should both be on your radar. If you do a balance transfer or if you cancel a cell phone bill to go to another provider, those will affect your credit score because you’re closing out what could potentially be your longest account. If you do take advantage of a balance transfer promotion, don’t cancel the old account; you can still leave it open and not use it.
New credit looks at credit inquiries and the number of recently opened accounts. These are worth 10% when calculating your credit score. One thing I learned was that decades ago, there was a lot of credit card fraud. People would get new credit cards from all the different banks, rack them up, and then not be able to pay them all off. In order to curb that type of behavior of shopping for credit for shady reasons, credit bureaus started reporting how many times you apply for new credit and when, and with whom! These inquiries may have a small effect on your score in the grand scheme of things, but doing this too much in a short period of time can really drag your score down. On a positive note, this aspect of calculating your credit score revolves pretty quickly, so your score will bounce back, but we do need to be mindful of it, especially when you’re planning on buying a house in Leduc in the next year or two.
Types of credit are worth 10% and by “types,” I mean different categories of credit like credit cards versus auto loans – revolving credit or installment credit. Installment credit would be like a car loan where you know what the payment is every month and you’re paying installments toward one amount over time. Revolving credit is like a credit card where your balance changes per your usage and can do so in a relatively short time frame. When it comes to trying to get a mortgage, these are viewed differently. The loan officers and underwriters don’t look at your minimum payment on revolving credit; they look at the balance due when calculating the mortgage payments you can afford.
Out of all of these, the max score you can get is 900. Over 680 is considered excellent.
Given the fact it is a weighted score with many moving parts, it’s always important to check it at least once a year, especially if you’re going to be buying a house. All mortgage companies use Equifax as their chosen credit bureau, so always check your Equifax credit report versus your TransUnion or Experian. If you check it through the bureau’s website, it won’t consider it to be an inquiry so it won’t lower your score.
One last note: If you’re on apps such as Credit Karma, we need to remember that when you don’t pay for a membership, you are the product. Just like with Facebook, Credit Karma gets funds to run the app through paid advertisements for you, their target market. They will promote credit card offers and “pre-qualified” loan offers right on the home screen of the app in hopes you will sign up for them. That is how they get their business. So, it’s important to be aware that your score might be slightly inflated so you can get a better credit card. These apps are easy to use to keep track of your payment history, but don’t rely on them for precise information on your credit score.
When you’re looking at renting or buying a house in Leduc, please don’t hesitate to reach out with your home buying or rental needs. I can help get you set up with a mortgage broker who can tell you how much you might qualify for so you’re ready to make an offer as soon as your dream home pops up on the Leduc real estate market!