I just read a great article by Jonathan Russell that details everything borrowers looking to purchase a new home or refinance their existing homes should read.
There are many factors that go into determining a borrowers credit scores. These factors include but are not limited to; credit mix, payment history, credit utilization along with collections or judgments.
In order to have a credit score and secure a mortgage borrowers will need to establish credit, which means stop using debit cards and begin using credit cards. Consumers can not build credit scores and credit profiles using their debit cards. Securing a credit card and paying them off weekly when you first get them will help you get used to having a credit card.
Credit mix is like baking a cake. You need different ingredients to bake a cake and consumers need different types of credit to build their credit profile and secure a high score. Credit mix means having a mix of credit cards and installment loans like a car loan/lease or student loans. I recommend applying for a credit card you can receive discount or build up points to buy product like a gas station Visa/Mastercard that allow you to get discounts on gas or at a closing store like Victoria Secret or the Gap so you get discounts on underpants and jeans.
Payment history is self-explanatory. Pay your bills on time and you wont damage your credit scores. Pay your bills late and your credit scores will plumet and it will take a long time to recover the lost points.
Credit utilization is the amount of available credit you have on your existing credit cards and loans. The higher lower the credit utilization the higher your credit scores. For example, if you have a credit card with a $1,000 limit and you carry a $500 balance on your credit card you’re at 50% capacity, which is not great when trying to build and enhance your credit profile. Same card but your balance is $250, your credit utilization is at 75% and this is great for your credit profile and will enable you to enhance your credit scores quickly. This is why I always recommend paying credit cards down and off if possible so you never have more than one week worth of charges on your credit card. This is proven technique that will help you enhance your credit profile and scores.
Collections and judgments are credit score killers. If you have a year or longer to enhance your credit score I recommend settling up with the collection company for pennies on the dollar to stop the pain the collection is inflicting on your credit profile and score. If you have to get your scores up quickly most collection companies offer what is called a quick resolve. A quick resolve allows the consumer to pay the collection in full and the collection company removes it as if it was never on the credit report, which can drastically increase a consumers credit score. First check with the collection company to make sure they off this service.
Judgments are an entirely different animal. This debt must be addresses with the original creditor before it can be removed from a credit report.