What is a credit score?
Your credit score is a number that mortgage lenders and banks use to estimate the risk in giving you a loan for your new home. Borrowers with higher credit scores present less of a risk to default on their loan and in turn receive a more favorable interest rate.
How is your credit score calculated?
Your credit score is calculated by plugging the data from your credit report into software that analyzes your past credit history and produces a number based on the findings. There are three major credit reporting agencies and they all use different software to produce this number, so don’t be surprised when each comes back with a different score.
Is a FICO score different from a credit score?
You will sometimes hear your credit score referred to as your FICO score. This is because the software used to produce a great number of the credit scores was originally created by the Fair Isaac Corporation. FICO is an abbreviation of the company’s name.
Which aspects of my credit history are most important?
When determining your credit score, certain aspects of your credit history carry different weight. Below is an approximate value that these various aspects of your credit report adds to your overall credit score calculation.
Your New Credit:
- This encompasses the number of accounts you have opened recently and the proportion of these new accounts to total number of accounts you currently have open
- Recent credit inquiries
- Have you been able to re-established a more positive credit history if you’ve had payment problems in the past
- Are you attempting to open numerous credit accounts in a short period of time
Types of Credit:
- Overall number of accounts that you currently have open (installment, revolving, mortgage, etc.)
- Having a mixture of account types generally generates better credit scores than reports that only contain, or contain a high number of revolving accounts (i.e. credit cards)
Length of Credit History:
- The length of time since your first credit account was opened
- The length of time since your most recent account was opened
- The length of time that you have maintained a positive credit history
What You Owe:
- The total amount owed on all of your open accounts and the amounts owed to the various types of accounts you currently have open
- The percentage of your revolving credit lines (credit cards) that you have used. Lenders are trying to determine if you are over extended financially
- Original Balances vs. Amounts you owe on installment loan accounts. Lenders want to make sure that you are actively paying down the loan balances
Your Payment History Includes:
- Total number of positive accounts: Accounts that were paid as agreed
- Total number of negative accounts: These include negative public records or accounts sent to collections
- Any delinquent accounts:
1. Total number of past due accounts
2. Length of time you have been past due
3. Length of time since your last past due payment
- Total number of accounts that carry a zero balance.
What is considered a “good credit score”
For the most part, credit scores usually range from 340 to 850. The higher the number, the lower the perceived risk in lending to you. As your credit score improves, you should see a decline in the interest rates offered to you.
While borrowers with credit scores over 700 are usually offered more attractive interest rates and have access to more financing options, don’t be discouraged if you have a lower number, because there are almost certainly mortgage products that will work for you.
Using Three Credit Scores
Your bank or potential lender will pull your credit score from all three major reporting agencies: Experian, Equifax, and Transunion. More than likely, they will then take the median score from the three to work your loan application. It is important to ask each potential lender which scores will be used and how they will affect your loan application.