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Key takeaway

Improving your credit score may help you secure your mortgage at a lower interest rate, and may result in a lower monthly payment on your home.

If you’re preparing to buy your first home, your credit report and credit score are very important. Lenders will use these two pieces of information as they determine whether or not you qualify for certain types of home loans and what interest rates they will offer you and how much you may be able to borrow.

And what do the two terms mean?

Credit report: This is a history of money you’ve borrowed or are borrowing now. The report lists every open or recently closed line of credit. Think credit cards, car loans, student loans, and even installment payment agreements such as your cellphone contract. The report also records how much you still have to pay off, and whether you’ve been making your payments on time.

You should review your credit report — and correct any errors — before you get ready to buy a home so that you may get the best possible loan terms and interest rate.

Credit score: This is a number assigned to your credit history. Credit scores typically range from a low of 300 to a high of 850. Generally speaking, the higher your credit score, the more likely a bank or other type of lender is to provide you a loan at a lower interest rate.

For more details on credit and buying a home, watch our short video.

The role of your credit history

Video Transcript

[Theme music]

[your Home Matters<sup>SM</sup> Minute logo and Wells Fargo logo on screen]

[Video title: The role of your credit history]

Your lender wants you to be a successful borrower, and so before making a loan, they will examine your current debts, payment habits, credit history, and credit score.

[Icon of person on screen with text What’s in a credit report?]

Your credit report is important because it is a record of your credit activities. It lists any credit card accounts or loans you have, the date you opened each account, your credit limit or loan amount, the balances, and your payment history.

[Icon of credit and loan on screen with text Credit accounts]

[Icon of calendar with text Date opened]

[Icon of loan with text Credit limit or loan amount]

[Icon of dollar sign with text Account balance]

[Icon of calendar with text Payment history]

It’s a good idea to keep track of your credit history and monitor it regularly, especially before you start the loan-application process. You can request a free credit report from each of the three main credit bureaus annually at www.annualcreditreport.com.

[Text on screen www.AnnualCreditReport.com]

[Icon of person with text What is a credit score?]

Your credit score is a number based on your credit history. Credit scores range from 300 to 850, the higher the better.

[Graphic of two bar charts. Left one is labeled Loan amount; right one is labeled Credit score with 350 at the bottom and 850 at the top of the bar. Text below the graphs says For illustrative purposes only. Animation shows the shaded area of the bars moving up and down]

Lenders consider your credit history and credit score when making decisions about loan approval, interest rate, loan amount, and the type of loan you can get. If you apply for a loan with one or more co-borrowers, lenders evaluate the credit of all applicants.

Credit scores are calculated based on a number of factors.

[Animation of a pie chart titled How are credit scores calculated. Section one says 35% payment track record; second section says 30% what you owe; third section says 15% length of credit history; fourth section says 10% new credit; fifth section says 10% type of credit]

Approximately 35% is your payment track record. So the most important thing you can do is pay your bills on time. About 30% is what you owe. Owing money on many accounts suggests to lenders you may be overextended.

Approximately 15% is the length of credit history. Lenders want to see you can responsibly manage credit accounts over time.

About 10% is new credit accumulated in the previous 12 to 18 months. Opening several credit accounts in a short period can indicate a greater risk.

And about 10% is the type of credit in use and the money available to you. If you have several types of credit, keep a “healthy” balance between revolving credit cards and installment loans.

Your credit history affects your borrowing options, so it’s important to know what your credit score is and understand the variables that affect it.

[Theme music]

Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A.
© 2014 Wells Fargo Bank, N.A. All rights reserved. NMLSR ID 399801. Equal Housing Lender.
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