How is my credit score calculated?

Credit scores are important. They are used for a lot of different things, some you may not realize! You know your score matters when it comes to mortgages and bank loans, but what about your job, apartment or your insurance? Credit scores can affect all of those items. So how is your score calculated?

The most common credit score used is your FICO score (Fair Isaac Corporation). The exact formula is unknown and it can vary depending on what you are doing. There are five categories used to determine your score.

-Payment history (weight 35%) – this is simply your payment history – do you have late payments or are they all on time? Recent late payments and anything past due will definitely lower your credit score

-Credit utilization – the amount you owe (weight 30%) – this is another area that can easily affect your score and may be the easiest way to improve your score. How much of your total credit are you using? If you are maxing out your credit cards, it will definitely lower your score. Ideally you want to keep your credit card balances around 30% of your total credit limit.

-Length of credit history (weight 15%) – how long have you had credit? The longer your history, the better. If you have had a credit card for many years, it is one you want to keep open. If you close an account that you had for years, it can affect your score.

-Credit mix (weight 10%) – what type of credit do you have? Do you have credit cards and installment loans, maybe a mortgage? That is the ideal, if you just have installment loans or maybe just credit cards, it can lower your score.

-New credit (weight 10%) – Did you just open new accounts? Have you had recent inquiries on your report? These can lower your score, especially credit card inquiries. A mortgage inquiry will be the smallest hit as you typically can only get one mortgage at a time, but you can open several credit cards at once, so that can hurt your score.

Credit Score Ranges: credit scores range from 300-850. The higher the score, the better! Anything over 740 is very good. From 680-739 is good. 580-679 is fair and below 580 is poor. Typically you need at least a 620 to get a mortgage although it is possible to get mortgages with scores down to 580 (FHA financing). Remember the higher your score, the better for interest rates and loan approvals.

What can you do to improve your score? Make sure you make all your payments on time – that is easy to do and makes a big difference! Try not to max out your credit cards. The trick to keeping your score higher is to keep your credit card balances below 30% of the credit limit. Try to avoid opening too many accounts at one time. If you have new credit, it can hurt your credit score until you have had time to make some payments on the new credit. Don’t close your accounts, especially not major credit cards. The length of your credit history is important in your score.

Make sure you check your credit at least once  a year so you know if there are any errors on your report. You can get a free copy of your credit report at http://www.annualcreditreport.com. This will not give you your scores but will show you your credit report so you can look it over and see if there are any errors.

As we see interest rates increase, it will be important to keep your credit score as high as you can. If you have questions on your credit report, make sure you ask your loan officer! We are here to help you!

Leslie Vanderwerf,  NMLS ID#335509, Cross Country Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website

Written By

Currently a Senior Loan Officer at Cross Country Mortgage LLC, it's hard to believe I have been in the mortgage business for more than 25 years and have worked with Sharlene since 2000! I love sharing mortgage insights here each week and helping people finance their homes. Listening helps me find the right program for you!

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