In general, the higher your credit rating, the lower the interest rate youll pay on your mortgage. The main factor in obtaining a high credit rating is to pay your bills on time. Even one missed payment can drop your credit score significantly.
The amount of credit you have used compared to the maximum amount of credit available is called credit utilization. For example, a credit card with a maximum limit of $5000 with a $4500 balance will hurt your score more than the same card with a $2000 balance. When you are applying for a mortgage it may be smart to pay down your credit cards to less than half of their maximum limit. This helps your score because it shows that you use credit sparingly and are therefore less of a risk to the lender.
You should review your credit report periodically and make sure to check for errors.
It is also important to understand what factors and how much "weight" they carry in computing your credit scores.
Payment history makes up roughly 35% of your credit rating. Paying all creditors in a timely manner carries significant weight.
Amounts owed attributes to 30% of your credit rating. It is good practice to spread debt over many accounts than to carry a large debt load on fewer accounts. You want to focus on keeping your balances under 50%, but preferably around 30% of your credit limits.
The length of your credit history factors into about 15% of your credit scores. In order to get started in the right direction you want to have at least 2 tradelines and 6 months of activity to generate a score.
The ability to obtain new credit makes up 10% of your credit profile.
And finally the types of credit will factor in to 10% of your credit scores. A variety of credit such as mortgages, revolving accounts (credit cars), installment loans (personal loans, auto, etc.), and any other consumer accounts can affect your scoring.
Some credit attributes that Do Not determine your FICO score are your income, assets, and demographic data.
Not only are late payments going to have a huge negative affect on your credit but recent late payments with amounts listed in the past due column of your credit report are going to affect your credit scores even worse. Whenever there is an amount listed in the past due column it will have an even worse affect on your credit score. Therefore, if you have collection accounts with past due amounts listed on your credit report these will affect your credit even worse than collections without a number listed in the past due column. Please consult your mortgage broker for more information.
Late payments on your mortgage have the most drastic negative impact out of any type of credit account.
Not only do late payments on your mortgage affect your credit rating, they also are looked at as a separate category when applying for a mortgage. Thus it is possible for someone with no late payments on their mortgage to get a better rate than someone with a higher credit score who does have late payments on their mortgage. For this reason, you should always try to pay your mortgage on time even if you have to pay some other bills late.