Your FICO credit score is important when considering buying a home. High scores can qualify for loan packages with lower interest rates, which can increase your borrowing power and lower your monthly payments.

If you have a less-than-perfect credit score, you still have options available for purchasing a home, albeit at a cost. Conventional loans typically require a credit score of at least 620, while FHA loans allow scores as low as 580.

Understanding Credit Scores

A credit score is an assessment of your likelihood to repay a debt, based on your past debt repayment history. Information about your credit history is collected by three main credit bureaus: Equifax, Experian, and TransUnion, to formulate your overall credit score.

Factors such as payment history and credit utilization are crucial, comprising 65% of your credit score. Other factors, such as the length of your credit history and the types of credit you have, also affect your scores.  Here is the breakdown of the data credit bureaus look at, and how this impacts your score:

Payment history – 35% of your score:

Your credit reports reveal your payment history, or whether you’ve consistently paid bills and other obligations on time.

What to do: Pay all bills on time. Paying bills late by 30 days or more can dent your scores — and the later you pay, the greater the damage. Set up auto-pay or calendar reminders so you don’t miss due dates. You might also want to ask creditors to move your due dates, so they better align with when you get paid.

Credit utilization – 30% of your score:

The amount of your credit limit you use, expressed as a percentage, is called credit utilization. FICO says the amount of available credit you use counts for 30% of your score, while the Vantage score puts credit utilization at 20%.

What to do: Experts recommend using no more than 30% of your available credit. People with the highest scores tend to use much less than that. To keep your credit utilization low, you can try things like setting balance alerts or making extra payments during the month. The good news is that score damage from having high credit utilization can be reversed. Once you pay a high balance down and the creditor reports it to the credit bureaus, the damage disappears.

The length of time you’ve had credit – 15% of your credit score:

Longer is better, so keep old accounts open unless there is a compelling reason to close them, such as an annual fee on a card you no longer use. You might be able to help yourself a little in this category by becoming an authorized user on an old account with an excellent payment record.

The kinds of credit you have, or credit mix – 10% of your credit score:

It’s best to have a mix of installment accounts — those with a set number of equal payments, such as car payments or mortgages — and credit card accounts.

The length of time since you’ve applied for new credit – 10% of your credit score:

Each application that causes a hard inquiry on your credit may take a few points off your score.  When possible, request a “soft pull” of your credit instead of a “hard pull”.  The credit provider gains almost as much information with a soft pull, and running a soft pull credit report does not impact your credit score.

What is considered good credit?

 FICO credit scores range from 300-850. Most consumers have credit scores between 600 and 750.

FICO score Consideration
300-579 Poor
580-669 Fair
670-739 Good
740-799 Very Good
800-850 Exceptional