By RMM Team
2023 Credit Score Guide and Tips for Improvement
Many borrowers often misunderstand what all goes into calculating a consumer’s credit score, focusing on the negatives such as delinquent payments and collection accounts. Let’s dive in and look at factors that impact your FICO credit score, how lenders factor your credit score into your mortgage rate, and ways to improve your credit score before you submit your mortgage application.
by: Jeremiah Clay
Tips for Improvement
Most of us know that your credit score impacts your ability to obtain financing. But did you know your credit score can also impact your mortgage rate? From retail credit cards to student loans, payment history, and credit utilization, there are multiple factors that play a role in creating your composite credit score. According to FICO, the average credit score in the U.S. is 716, up from previous years.1
Where does your score stand?
If your score is below average, don’t stress. ReviewMyMortgage.com’s curated list of tips and tricks will help you hone your credit score, compare mortgage solutions, and obtain the best mortgage rate possible.
Let’s dive in and look at factors that impact your FICO credit score, how lenders factor your credit score into your mortgage rate, and ways to improve your credit score before you submit your mortgage application.
What is FICO?
You may have heard the term FICO used in conjunction with your credit score on more than one occasion. Yet while FICO is often used synonymously with a borrower’s credit score, they are not actually the same thing.
FICO (Fair Isaac Corporation) is a U.S. company that has created a credit scoring model which analyzes a person's credit report through the use of proprietary software and algorithms that compile information reported by the three national credit bureaus.2
There have been many versions of the FICO credit model over the years so it could be hard to pinpoint which model your lender might be utilizing in their decision-making process, however 90% of the top lenders rely on a version of this model.3
The latest version, FICO Score 10, uses a trends-based approach mixed with predictive power to review how you have utilized and managed credit over a previous 24 month period and how you manage credit in the future.3 It then generates a composite score between a range of 300-850, with the higher being preferred.2
What Impacts Your Credit Score?
Many borrowers often misunderstand what all goes into calculating a consumer’s credit score, focusing on the negatives such as delinquent payments and collection accounts.
While it's true that your payment history does influence your overall score, there are also many other factors the repositories take into account.
In fact, all three credit repositories in the United States: Experian, TransUnion, and Equifax, use similar criteria when calculating your credit score. According to Experian, the five key areas to focus on the most include3:
- Payment History
- Credit Utilization
- Age of Tradelines
- Types of Credit Accounts
- New Inquiries
Payment History
It's no secret that the credit bureaus pay a lot of attention to if you pay your obligations on time. Ultimately, lenders want to lend to responsible borrowers who demonstrate the ability to repay debts. It is so important that around 35% of your FICO credit score is weighted on your payment history.4
Credit Utilization
Another major factor that impacts your credit score almost as much as your payment history is your credit utilization. This refers to your total outstanding balances, both collectively and for each tradeline, compared to your respective credit limits.
Lenders review your credit utilization to see how reliant you are on debt to pay for expenses versus using cash or other liquid assets. In general, using more than 20-30% of the credit available to you has an adverse effect on your overall score.4
Age of Tradelines
It seems silly but newer credit is actually less beneficial than keeping older tradelines open. This can be attributed to the fact that older tradelines have more information about your spending habits, repayment history, and utilization.
It also speaks to your tenure as a borrower and how well you manage your credit. So, before you go chopping up that first credit card you ever owned, consider using it as an alternative to a new retail card that may get you a quick, one-time discount.
Types of Credit Accounts
Much like with investing, diversification provides many benefits to your over credit profile. This means you want to have a broad mixture of credit accounts to help increase your credit score. While this may only account for around 10% of your composite score, it could spell the difference between a good score and an excellent score.4
New Inquiries
While inquiring about opening a new account occasionally is not particularly impactful, if done too frequently it can chip away at any excellent score. This includes inquiries that both resulted and did not result in a new account. Multiple credit checks in a short amount of time can be a red flag to most lenders so expect to get questions when applying for a new mortgage.
How Your Credit Score Affects Your Mortgage Rate
Your credit score helps determine what pricing is available when you apply for a new mortgage. Specifically, lenders will need to review your score to determine if any necessary loan-level price adjustments (LLPA) need to be applied.
Loan-level price adjustments (LLPAs) are fees assessed as part of a lender’s risk-based pricing model to help account for variances in a borrower's credit profile.5
It's important to note that government-sponsored entities Fannie Mae and Freddie Mac are the ones to determine if LLPAs apply based on their set rules and requirements.
A few things that could impact your mortgage rate include your credit score, your loan-to-value (LTV), and the type of mortgage product for which you are applying.5 Other criteria may also be considered such as the occupancy type for the subject property.
LLPAs can work similarly to mortgage points, although borrowers are not always fully charged them as upfront fees. Instead, your lender may choose to absorb some or all of these costs but charge you a higher interest rate.5
Improve Your Credit Score - Tips and Tricks
In general, credit scores seem to be on an upward track, as most demographics saw their credit score improve in 2020 from 2019.6 Yet despite these metrics, Millennials still lag behind most other generations comparatively.6
While your credit score isn’t the only criteria that qualifies you for a new mortgage, a higher score will help solidify optimal pricing and repayment terms. If you are looking to improve your credit score, ReviewMyMortgage.com recommends these tips and tricks.
- Obtain your annual free credit report. By law you are entitled to a free copy of your credit report each year. When you receive your copy, make sure to review it for any discrepancies. If you do find errors, make sure to dispute and resolve these prior to applying for your new mortgage
- Set-up autopay to help reduce late or missed payments. Since your payment history is the biggest factor impacting your credit score, fixing this will help improve your score faster. Some lenders even offer discounted rates or other perks for setting up auto-pay which could save you additional money each month.
- Attend credit counseling to better understand how to efficiently manage your credit. Credit counseling can also help provide you free tools and resources to help you create a budget and manage your finances.
- Connect with a credit repair specialist. If you have had difficulties managing credit in the past, a credit repair specialist can help review your credit profile, provide advice, and help get you back on track to improve your credit score. ReviewMyMortgage.com can even help you find a reputable vendor to partner with.
Sources
4 Experian. (2021, October 26). What Affects Your Credit Scores? Retrieved December 29, 2021, from https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/
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