Wondering how to increase your credit score? Want to know what credit score you need to buy a house? Or the impact of your credit score on your home loan? This article examines what a good credit score looks like, how it’s calculated, and how it fits into the homebuying process. We’ll also give you tips on how to improve your score!
What Is a Credit Score and Why Does It Matter?
While there are many different types of credit scores, FICO® is by far the most common and the one we’ll be focusing on in this article. Your credit score is a three-digit number ranging from 300-850 and is a quick and fairly objective way for lenders to gauge your financial stability and ability to repay loans. In other words, your credit score governs your chances of being approved for a loan or other financial service and the rate at which that service is offered. The higher the score, the better your chances are for approval and fair rates.
How Is Your Credit Score Calculated?
Five components make up your credit score, here’s what they are and how they’re weighted.
Payment History (35%)
Paying your bills on time is the most important good credit habit and the largest factor in your FICO® score.
Owed Amount (30%)
Relative to credit limits and original loan balances, owing a lot of money will bring your score down.
Credit History Length (15%)
The longer you’ve had open credit cards and have been working on your score, the higher your score.
New Credit (10%)
Applying for many new cards or loans in a short period of time will bring your score down in the short term.
Credit Mix (10%)
Ensuring you have multiple and a mix of accounts (credit cards, a car loan, student loans, etc.) will show lenders you’re responsible and raise your score.
Source
Average Credit Scores & Ratings
See how your credit score compares to others in Colorado and by age.
Here’s How FICO Scores are Rated
- 800 to 850: Exceptional
- 740 to 799: Very good
- 670 to 739: Good
- 580 to 699: Fair
- 300 to 579: Poor
The current average credit score in America is 717 and the average in Colorado is 731.
Source
Average Credit Score by Generation
Silent generation: 760
Baby boomers: 742
Generation X: 706
Millennials: 687
Generation Z: 679
*2022 stats
Source
How To Improve Your Credit Score for Buying a Home
Credit management for homebuyers is mainly about being responsible. In most cases, borrowers will need to have a credit score of at least 620 to secure a mortgage loan. There are government-sponsored mortgage programs that can have lower required scores but not everyone is eligible for these.
Tip #1 — Get a Handle on Your Current Score and Reports
Pull a credit report — contrary to popular belief, this does not affect your credit score! This will help you familiarize yourself with what potential lenders would be seeing about you and you’ll want to review the report to make sure everything is accurate.
Tip #2 — Make Timely Payments
Your payment history is the largest factor in your credit score. Paying your bills on time is vital to raising your score and keeping it high.
Tip #3 — Raise Credit Limits to Lower Credit Utilization
‘Credit utilization’ simply refers to the amount of credit you’re using divided by the total amount available to you. The lower this number is, the better your score (most recommend a utilization under 30%). An easy way to achieve this without having to reconfigure your whole budget is to ensure your total credit line is as high as possible.
Tip #4 — Do Not Apply for New Credit Cards or Loans While Asking For a Mortgage Loan
While having many accounts can help raise your score in the long run, it can hurt you in the short term. Lenders want to know that you’ll be able to pay them back promptly and that you’re not over-extending yourself and your finances while also asking for a mortgage loan.
Source
Interested in a Koelbel home? Check out our communities across Denver and the Front Range. We even have move-in ready homes waiting for you! If you have more questions about credit scores, home loans, or the home-buying process you can check out our guide covering What To Expect When Buying A Koelbel Home here or reach out to us to learn more.
Back To Resources
