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Credit Score 101

If you’re in the market to buy a home, you should already know how important your credit score is when securing financing. Understanding the basics of your credit score can help you make better financial decisions and allow you to have the upper hand in loan negotiations. Read on to learn the basics of your credit score. 

What is a Credit Score?
Although a credit score may seem complicated, it is remarkably simple. Your credit score is a three digit number between 300 and 850 that helps lenders determine your eligibility for home and car loans, personal loans and credit cards. Your credit score is one factor that helps lenders decide whether to approve you for financing, as well as determine your interest rate. 

What Makes a Credit Score Good or Bad?
Your credit score is evaluated differently depending on the type of loan or credit you are seeking; however, here are some general guidelines that determine the strength of your credit score:
•    Very Poor: 300-579. With a very poor credit score, you will be unlikely to secure a loan for a home or other large purchase, as you are seen as a very high-risk borrower by lenders. If your credit score is in this range, beware of subprime loans that target people with low credit scores. While these predatory loans may sound like a good idea at first, they come with extremely high interest rates and expensive fees. 
•    Poor: 580-639. With a poor credit score, you may be able to secure a home loan, but you will be saddled with a high interest rate and high fees. 
•    Fair: 640-699. A fair credit score will allow you to qualify for a home purchase; however, you will not receive the best interest rates available. 
•    Good: 700-749. With a good credit score, you will be able to secure a good mortgage loan with favorable interest rates.
•    Excellent: 750-850. If you have a credit score in the excellent range, you can expect to enjoy the best interest rates on your loans, as you are seen as a very low-risk borrower by lenders. 

How is a Credit Score Calculated?
Credit scores are determined by formulas that show how you repay debt over time. Using this formula allows credit rating companies to compare positive and negative factors on your credit history to determine your credit risk. Some of the factors that go in to your credit score include:
•    New credit: The number of credit lines you open in a short span of time factors into about 10 percent of your credit score. Each line of credit that you open can lower your score until your credit history for that line of credit is established.
•    Length of credit history: The length or duration of your credit history factors into approximately 15 percent of your credit score. A longer credit history will increase your credit score as it gives lenders a history to base their decision on.
•    Credit mix: The variety of your credit lines accounts for about 10 percent of your credit score. Taken into account will be your retail credit accounts, credit cards, installment loans and other loan types. 
•    Payment history: Your payment history makes up the largest chunk of your credit score at 35 percent. Lenders will look at whether you have paid your current debts on time and on schedule to see if you are a credit risk. The more payments you make on time and on schedule, the more favorable your payment history will be. 
•    Amounts owed: The amounts you owe at the time your credit report and credit score are pulled will account for the second largest chunk of your score at 30 percent. If you are seeking a home loan, consider paying down your current or outstanding loan amounts first. 

What if I Don’t Have a Credit History?
Having a credit history and a credit score is important when attempting to secure a loan for a home. A credit history allows lenders to estimate the risk of making a loan to you. No credit may equal higher interest rates and fees. There are ways you can fix the issue, though. To establish credit for yourself, apply for a credit card that offers a low-interest rate and no annual fee. Charge a small amount onto the credit card every month and commit to paying off the amount in full. Over time, this will establish a favorable credit history for you that will serve you well in the future.

If you think your credit score could keep you from buying a home, you might be surprised! The NC Home Advantage Mortgage™ offers competitive mortgage rates and down payment assistance that you may qualify for. Learn more about the Advantage at www.nchfa.com.
And if you have a not-so-great credit score, check out next week’s blog for tips to improve your credit score so you can qualify for financing and enjoy better interest rates.