Mortgage 101: How is My Credit Score Determined?


How is my credit score determined?

This is a common question borrowers ask us. Today on the blog, we are talking about the factors that determine your credit score and how they can impact your credit. Your credit score is determined by five factors, the following information can help you make better choices regarding your credit.

1. Payment History (35%)

Payment history is the highest weighed factor when it comes to determining your credit score. This includes payment information, delinquent payments, how often you pay your bills on time and if you have filed bankruptcy. Factors that can contribute to a lower score include the following:

  • Missed payments – how recently they occurred and how late they were.
  • Debt that has been turned over to a collection agency
  • Any tax liens, foreclosures or bankruptcies.

Keep in mind, the more recent and frequent the delinquent payments are, the larger the negative impact on your score will be. You can improve this factor by paying your bills on time and resolving any collection debt you may have.

2. Credit Utilization (30%)

Not far behind credit history, is credit utilization. This factor looks at how much of your available credit you are using in relation to how much credit you have. Generally, this ratio should be at or below 30%. For example, if you have a $10,000 line of credit the ideal debt amount would be $3,000 or less. Maxed out credit cards and having a significant number of accounts with balances can create a negative impact on your score. Improve this factor by paying down balances when possible. 

3. Age of Credit (15%)

The age of your credit is determined by how long ago you opened your fist account and they also take the average age of all your credit account. If you are in your early twenties this can be a challenging factor to overcome. However, a parent can easily add you to one of their older credit accounts as an authorized user and this can help improve the age of your credit. 

4. Credit Inquiries (10%)

Credit inquiries include any new requests for credit such as applying for credit cards and loans. Keep in mind if you are rate shopping for a mortgage, this is taken into consideration. Promotional, consumer, insurance and employment inquiries also do not count against you. Improve this factor by only applying for credit when you actually need it. 

5. Types of Credit (10%)

Having different types of credit can increase your credit worthiness. There are two credit types of lenders look at, installment credit and revolving credit. Installment credit is credit that has a set number of payments for example, a car loan. Revolving credit is credit that does not have a set number of payments and this would include accounts such as a credit card. Improve this factor by having a diverse set of credit lines. Auto loans and mortgages are a great addition to credit card lines.

Why is Understanding My Credit Score Important?

All lenders use credit scores as part of the approval process. Knowing how your score is calculated can give you the power to improve your score! If you have credit challenges, use this information to make better choices when it comes to your credit. If you already have a good credit score, do you know why? Use this information to keep you on track.

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