What’s In A Credit Score?

What’s in a credit score? Good question. According to Credit Karma, your credit score is a three digit number calculated from your data-rich credit report and is one factor used by lenders to determine your creditworthiness for a mortgage, loan, or credit card. Your score can affect whether or not you’re approved as well as the interest rate you’re offered, so it’s important to read on and understand the factors that go into making up your credit score!

FICO® Scores at each Bureau

The most popular model used to determine your credit score is FICO®, and is used by 90% of top lenders according to myFICO.com. This model takes various factors from your credit history and gives you a number. Your FICO® score will range from a 300 to an 850. The higher the score, the lower the risk for the lender.

There are free credit reports online that you can easily access but it’s important to know that these are estimates. When you go to apply for a loan, the lender may come up with a different credit score than what you previously received. Why? It depends on the tools they’re using to pull credit reports. It’s also good to know that the major credit bureaus may give you a different credit score based on the credit history information they have in your name.

Based on the information in your credit report, your credit score is based on these five major factors. It’s not basic math, each has its own weight, but all are important.

  • Payment history
  • Amounts owed
  • Length of credit history
  • Types of credit used
  • New credit

Payment history

This is the first thing your lender will look at. It takes into account if you’ve paid your past credit accounts on time and is definitely one of the most important factors of your credit score and determines about 35% of your FICO® score. It takes into consideration payments on accounts such as credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans.

Your payment history can be negatively affected by things like bankruptcies, foreclosures, lawsuits, wage attachments, liens, and judgments.

A late payment isn’t an automatic credit score killer. An overall good credit score can outweigh a few instances of late credit card payments, and just because you don’t have any late payments doesn’t mean that you’ll have a high credit score. When it comes to late or missed payments, FICO® score considers how late they were, the amount owed, when they occurred, and the number of late or missed payments.

Amounts owed

Amounts owed counts for about 30% of your FICO® score. Owing money or having debt doesn’t necessarily label you a high risk borrower, therefore punishing you with a low credit score. On the other hand, if you’re using a high percentage of your available credit, this may indicate that you’re overextended and may not be able to make future payments.

Amounts owed includes several factors:

  • The overall amount owed on all accounts
  • The way your debt is split up between types of accounts
  • Credit utilization ratio on revolving credit accounts
  • The number of accounts with balances, and the amount of available credit being used
  • The outstanding balance on any installment loan compared to the original amount
  • Length of credit history

    Making up about 15% of your FICO® score, a longer credit history generally means a higher credit score, but even people without a long credit history can have a high credit score depending on how the other factors of the score look.

    Your FICO® score considers the following concerning length of credit history:

  • The age of your oldest account, the age of your newest account, and the average age of all your accounts
  • The length of time since you actually used certain accounts
  • Credit mix

    Credit mix determines 10% of your FICO® score. The types and number of credit accounts you have both play a role in this. Your credit mix isn’t usually a key factor in your credit score, but it may come into play if your credit report doesn’t have a lot of other information to determine your score.

    New credit

    The number of new accounts and recent inquiries you have, the time since the accounts were opened and inquiries were made, and whether you have a recent good credit history are the factors that make up the new credit portion of your credit report, which determines about 10% of your FICO® score. Things like opening too many new accounts too quickly can negatively impact your credit score.

    Interested in learning more about the wide-world of home loans? Check out more of our blogs!

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