What exactly affects your credit score?

On the hunt for your first home? Getting pre-approved is crucial so you are aware of how much you can afford. That way you don’t fall in love with something out of your budget. But what determines your qualifying amount? Your credit score is a major factor.

But what affects your credit score? If you’re still living at home and have never made a large purchase before, then you likely don’t understand credit scores at all. Those who have applied for rental housing have likely had to deal with credit scores; landlords ask for them to ensure they are leasing to a tenant that will actually pay rent in full and on time.

The first thing you should know is that credit scores are a three-digit number, usually ranging from 200 to 900. If you’re up in the 800-900, you’re the best, keep it up.

A more realistic target is in the 700 range. Most banks and lenders want you to be somewhere around 750. As soon as your credit score dips below 700, you’re running the risk of not getting approved for whatever you happen to be applying for.

We’ve outlined five factors that affect your credit score so you can get a better grasp on it for when it comes time to get approved for your first mortgage.

1) Payment history

Late payments affect your credit score negatively. It proves that you can’t pay what you owe on time. It’s also frowned upon to constantly make the minimum payment. Your balance will increase quickly due to the interest and you’ll find yourself in trouble. For a good credit score, always make payments on time - set reminders in your phone if you have to.

2) Current debt

Banks and lenders will look at your current debt relative to your credit limit. If your balance accounts for 90% of your limit, that’s not good. Depending on the institution, 60% to 70% of your limit is the max balance you should carry.

This is the reason it makes sense to have credit cards with higher limits. The higher the limit, the better your ratio can be. The catch is you need good credit to qualify for a higher limit. Also, some people can’t handle having a higher limit - if they have access to more money, they’ll spend it.

3) Credit applications

Here’s the crazy thing about credit: Requiring credit is bad for your credit score. Whenever you apply for a credit increase or new form of credit, your credit score is negatively impacted because it’s a sign of you needing money. Even checking your credit score can lower your credit score; banks and lenders see this as suspect activity...if you were good with your money, why would you need to check your credit score so much?

4) Types of credit

Now things get confusing. Remember how we just said that applying for credit can be bad for your credit score? Well, having a mix of different types of credit is better than having only one form. For example, making on time payments for your vehicle, phone, mortgage, and credit cards looks better than your only credit being in the form of a credit card.

We’re not saying to run out and apply for a loan, it’s just something to keep in mind. Good credit is something built up over time.

5) Sent to collections

This is very bad for your credit score. If you owe money and you’re not paying it, it’s possible that your debt could be sold to a collection agency. The collection agency then chases you down much more aggressively and your debt is increasing thanks to interest. This torpedos your credit score, so make sure you’re making all your payments!

We hope this helps you understand your credit score a little bit more!