Lenders have been using FICO or VantageScore credit scores in assessing mortgage applications. They primarily rely on these scores to determine the rate a borrower applying for a mortgage will get. Credit scores are a reflection of your credit report, a log of your credit activities in the past.
We have thus gathered a handful of tips found on FICO and VantageScore websites in improving your credit score and ultimately boosting your access to better mortgage rates.
How Is a Credit Score Calculated?
FICo and VantageScore have their own method of calculating credit scores based on the information on credit reports. Pay attention to the components and the corresponding weight that make up a credit score at each of FICO and VantageScore. Take a look.
|Payment History||35%||Payment History||40%|
|Total Amounts Owed||30%||Depth of Credit/Length of Credit History||21%|
|Length of Credit History||15%||Utilization of Credit||20%|
|Types of Credit Used||10%||Balances||11%|
|New Credit||10%||Recent Credit||5%|
Credit Score Improvement Tips 101
Now, let’s focus on the behavior that would have a positive influence on your credit score and improve it over time.
1. Pay bills on time. Your payment history takes up 35% at FICO and 40% at VantageScore. If you’ve been timely in your bills payment, you are handling your debt wisely.
FICO suggests that setting up a payment reminder so you can promptly pay your bills. Automate payments on your existing debts using your debit card.
VantageScore reminds about not missing out on any payment. Your first late payment entails a slight drop but being late on other debt payments signifies a credit risk and a huge score drop.
Even with missed payments, you can strive to remain current on your accounts. Delinquency could land your account in collections, which takes seven years to remove.
2. Carry sufficient debt. It’s okay to owe money but you can only carry as much. Total amounts owed is 30% of your FICO score while in VantageScore, this equals to: 20% for utilization, 11% for balances and 3% for available credit.
According to FICO, reduce the total amount you owe by not using your credit cards in the meantime or paying down some of your debts starting with those with the highest rates. Paying off some debts might be wiser than moving it around. If you do the latter, you end up with the same amount owed but with fewer accounts which could lower your score.
VantageScore advises to not use all of your available credit and if you do, keep your outstanding balance below 30% of your credit limit across all accounts. By keeping your debt at that level, you will appear to the lender as someone with sufficient access to credit without straining for additional funds.
3. Apply for credit prudently. New credit constitutes 5% of your VantageScore and 10% of your FICO score. It also affects your depth of credit of 21% at VantageScore and FICO’s length of credit history of 15%.
Per FICO, new accounts are useful to build or rebuild your credit by paying your bills on time. But don’t open too many accounts in a short span of time if your length of history is fairly new. It’s also okay to shop for rates within a certain period of time, with inquiries leading to a single loan instead of multiple credit lines.
VantageScore recommends applying for loans only when you need it. Also, avoid having too many new accounts at once because it could cast doubts on your ability to manage them.
4. Maintain a good mix of debts. FICO allots 10% for a good credit mix of revolving debt like credit cards and installment debts like car loans, home loans, and personal loans.
To VantageScore, having a good mix shows you are an experienced credit user. FICO, however, warns about opening new credit lines just for the purpose of meeting the credit mix criterion as it might not raise your score.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.