Components of Your Credit Score

Credit is an everyday reality, but how well do you understand your credit rating and the factors that influence it?

If you’re like most people, you’re not clear on what shapes your score but when it comes to financing a home, it’s critical that you do. Your credit rating is represented by a numerical score that describes what type of risk you are for lending money. The higher your score, the more willing lenders will be to extend you a loan or a line of credit.

Various third parties compile a variety of factors from your financial history to calculate your score. The most commonly known credit scoring term is a FICO score. FICO is actually the algorithm used by Experian and not the score itself.

The three biggest U.S. credit bureaus, Equifax, Experian and TransUnion, all use algorithms to determine credit scores. Lenders will use an average of all three credit scores as your “qualifying” credit score to determine whether or not they will provide you with a home loan and at what interest rate.

Understanding the range of scores and how they relate to obtaining a home loan tells lenders only part of the story. It’s important to understand the factors that influence your score. Let’s look at some of the key influences of your credit score:

  • Payment history on loans and other lines of credit. This accounts for roughly 35 percent of your credit score. This includes bankruptcies, delinquencies and payments that were past due. In fact, having any late payments, especially multiple late payments for the same lender, can seriously harm your score.
  • Number of credit accounts and how much you owe on them. This accounts for approximately 30 percent of your credit score. This not only looks at your outstanding debt, but also how close you are to maxing out your credit line for these accounts.
  • Age and frequency of your credit and activity. This accounts for about 15 percent of your credit score. Essentially the longer you have held a line of credit, the more it will benefit your overall credit score rating. Using a credit card and regularly paying it off benefits your credit to an even larger degree. However, so does keeping your credit line open. So remember to hold onto old accounts, rather than close them.
  • New accounts. This can sway your credit score by as much as 10 percent. If you apply for various lines of credit in a short amount of time, you will hurt your score. There is some nuance to this. For example, if you apply for multiple loans within a certain time period, it denotes that you’re rate shopping, and that would not negatively impact your credit score.
  • Mix of credit. This impacts your score by 10 percent. The methodology takes into account your capacity to hold and responsibly manage different types of credit, including revolving debt, such as credit cards, and non-revolving debt, such as student loans and car loans.

Keeping your credit clean is a tough job, but if you know what helps it and what hurts it, you will be in better shape for the future. For more information, speak with a Licensed Lending Officer at (888) 983-3270 or click here.

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