We hear it all the time: “Check your credit score!” and other advice on how to keep it healthy. But what exactly is a credit score, and why is it important?
While related, your credit score and credit report are not the same things. Your credit score is a number that ranges from 300 to 850. In contrast, your credit report shows lenders your credit history, personal information like your name and address, whether you’ve filed for bankruptcy, and more.
Your credit score shows lenders your creditworthiness
Your credit score is used whenever you take out a loan, apply for an apartment or apply for insurance. Per The Fair Credit Reporting Act, only businesses who have a “permissible purpose” can check your credit score via your credit report:
“FCRA requires any prospective user of a consumer report, for example, a lender, insurer, landlord, or employer, among others, to have a legally permissible purpose to obtain a report.”
When these entities access your credit they are learning about the type of credit you are using, your payment history, and how long your accounts have been open.
A good credit score helps you get a mortgage
Before you apply for a mortgage, check your credit. Having a good credit score may help you get more favorable terms on your mortgage, like lower interest rates. The mortgage interest rate is related to your credit score and other financial factors like your debt-to-income ratio and down payment amount. A good credit score can help you save more money throughout the life of the loan.
Be aware of what can raise or lower your score
Your credit score is affected both positively and negatively by many different factors.
If your credit score is lower, you can take steps to raise it. This includes things like:
- Paying all bills on time
- Opening new lines of credit only when you need them
- Reporting errors on your credit report
- Reducing the amount of debt you owe
When reducing the amount of debt you owe, remember that paying off a loan (and closing the account) could negatively affect your credit score because you are reducing the mix of credit you have. The best way to keep your score healthy is to make responsible financial decisions and understand that there’s no “quick fix” to raise it fast.
At o2 Mortgage, our team is ready to help you understand your eligibility for a home loan. We believe that financial solutions should be tailored to your individual needs. We are here to help you obtain your dreams of homeownership!