Here’s a closer look:
Payment history (35 percent).
This is what a lender cares most about, whether it’s for a mortgage, car loan, credit card, or otherwise: your ability to pay bills on time. On-time payments hold the most weight in tallying your credit score. Your score will reflect the number of times you’ve paid late, by how many days (30, 60, 90, or in default), and if these were recurring late payments.
Keep in mind that: While it can be easier said than done in some cases, the most effective way to boost your credit is to pay all bills on time.
Amounts owed (30 percent).
Credit utilization is the amount you owe in contrast to your total credit limit. Credit/debt utilization basically describes how much you owe compared to the amount you can borrow. It’s a good practice to maintain your credit balance at no more than 50 percent of your credit limit—but 30 percent is even better.
Keep in mind that: A lower credit utilization positively affects your score, even more than not using any credit.
Length of credit history (15 percent).
The longer your credit history, the better this looks in the eyes of a lender. A lengthy history can support your trustworthiness as a borrower and skew your score higher. Conversely, opening new lines of credit can temporarily drag your score down within the first six to 12 months. This is why your Loan Officer may caution you not to open any new accounts when applying for a mortgage.
Keep in mind that: If you’re “credit invisible” and would like to prepare to qualify for a mortgage, it may help to open a few credit accounts in advance, use them responsibly, and pay off the monthly balances.
Credit mix (10 percent).
Having a variety of credit accounts also looks good to a lender because it shows you can manage your finances. A “healthy mix” might include several credit cards, a retail card, a car loan, and a mortgage. Note that taking out an excess of credit cards in your name isn’t necessarily ideal. Aiming for three to five credit cards that you rotate and can pay off is optimal.
Keep in mind that: Given that credit mix only makes up 10 percent of your score, it may not be worth your energy to focus on diversifying your credit. Paying off overdue bills is likely to have a bigger impact.
New credit (10 percent).
As mentioned, opening a lot of new accounts in a short window can seem risky. This influx of new credit inquiries—which show up on your credit report for 120 days—may indicate you’re carrying a disproportionate amount of debt. A hard inquiry occurs when you apply for new credit (like a credit card or mortgage) and differs from a soft inquiry, occurring when a company you already borrow from accesses your credit.
Keep in mind that: A hard pull on your credit report can lower your score, while a soft pull doesn’t. When you’re in the process of applying for a mortgage, multiple hard mortgage inquiries will be seen as one if they’re pulled within 45 days.