Credit Health and Repair

So, you’re thinking about buying a home? Congratulations! But before you start picking out paint colors and furniture, there’s a critical step we need to evaluate first—your credit score. Your credit score is like your financial reputation, and it plays a massive role in whether or not you’ll qualify for a mortgage. Let’s break down how to build and maintain a healthy credit score, focusing on the five factors that make up the FICO credit scoring model.

The Five Factors of Your Credit Score (Ranked by Importance)

1. Payment History (35%)

   • What It Is: This is the big one, accounting for a whopping 35% of your FICO score. Payment history tracks whether you’ve paid your bills on time. Every late payment dings your score like a car door hitting that concrete pole next to the gas pump.
   • How to Improve: Pay every bill on time, every time. Set up automatic payments if you’re forgetful, and try to get caught up on any past-due bills ASAP.

2. Amounts Owed (30%)

   • What It Is: This factor looks at how much of your available credit you’re using. Lenders like to see that you’re not maxing out your credit cards—keeping your balance below 30% of your credit limit is a good rule of thumb.
   • How to Improve: Pay down your balances, especially on credit cards. If you can, aim for using less than 10% of your available credit. Think of it like this: your credit utilization ratio should be as small as the slice of pie you tell yourself you’ll have after Thanksgiving dinner.

3. Length of Credit History (15%)

   • What It Is: The longer your credit history, the better. This factor looks at the age of your oldest account, the age of your newest account, and the average age of all your accounts.
   • How to Improve: Keep old accounts open, even if you’re not using them. Closing them can actually hurt your score because it shortens your credit history.

4. Credit Mix (10%)

   • What It Is: This factor considers the variety of credit types you have, like credit cards, mortgages, car loans, and personal loans. A healthy mix shows lenders you can handle different kinds of debt.
   • How to Improve: Don’t go out and apply for new types of credit just to boost your mix. But if you naturally have a variety, it can help your score.

5. New Credit (10%)

   • What It Is: This one looks at how many new credit accounts you’ve opened recently. Each new application causes a small, temporary dip in your score because lenders get nervous if they see you taking on a bunch of new debt all at once.
   • How to Improve: Only apply for new credit when you really need it. If you’re planning to buy a home soon, avoid opening new credit accounts in the months leading up to your mortgage application.

Building and maintaining a healthy credit score isn’t rocket science, but it does require some discipline and a bit of patience. By focusing on these five key factors, you’ll be well on your way to securing a mortgage and turning those homeownership dreams into reality. And if your credit score needs some TLC, don’t worry—there are plenty of resources to help you get back on track.

Credit Repair Tips for Damaged Credit

If your credit score has taken a hit, don’t despair—there are steps you can take to repair it:

1. Get a Copy of Your Credit Report: Start by requesting your credit report from all three major credit reporting agencies: Equifax, Experian, and TransUnion. You’re entitled to a free report from each once a year at AnnualCreditReport.com.
2. Dispute Errors: If you find any errors on your credit report, dispute them immediately. Even small mistakes can hurt your score.
3. Pay Down Debt: Focus on paying down high-interest debt first, then tackle the rest. Every dollar you pay off helps improve your credit utilization ratio.
4. Negotiate with Creditors: If you’re behind on payments, contact your creditors to see if they’ll work with you. Sometimes, they’ll agree to a payment plan or even remove negative marks in exchange for payment.
5. Seek Professional Help: If you’re overwhelmed, consider working with a reputable credit counseling service. They can help you develop a plan to get back on track.