How Your Credit Score is Calculated
The key to finding the best rate on a mortgage loan is to have a good credit history and a high credit score. Any lender will consider your credit score before approving you for any type of loan. It is your credit score that determines your financial risk to the lender. The higher your score, the more likely you will be, in the lender’s eyes, to pay back your loan. So, it is imperative that you understand the criteria from which your credit score is calculated.
Credit scores are calculated based on the date in your credit report. The most widely used software to generate credit scores was created by the Fair Isaac Corporation. So, many times, you may see credit scores references as FICO scores. As a general rule, there are five criteria used to calculate your credit score. The percentage of each criterion and the factors included in each are listed below:
35% – Your Payment History
- Number of accounts paid as agreed
- Accounts in collection
- Delinquent accounts
30% – Amount Owed
- Amount and type of accounts with balances
- Amount of total revolving credit that has been used
- Installment loan balances vs. original loan amount
- Number of zero balance accounts
15% – Length of Credit History
- Total length of time on your credit report
- Amount of time since opening of accounts
- Date of last activity on accounts
10% – Types of Credit Used
- Total number of installment, revolving, mortgage or other types of accounts
10% – New Credit
- Number of accounts recently open
- Proportion of new accounts to total accounts
- Number of recent credit inquiries
- Length of time past for recent inquiries or new accounts
Credit scores range from 340 to 850. Borrowers with a credit score over 700 are usually offered more financing options and better interest rates on loans. So, the more you know about your credit score, the more likely you are to qualify for your next loan.
We hope this helps you understand YOUR credit score!