What’s in a credit score?
March 16, 2017
If you're getting ready to buy a home, you should be at least as obsessed with your credit score as you are with Zillow. It’s a make-or-break number. Without a healthy score, it’s hard to qualify for a mortgage loan. And a nice high score can get you a lower interest rate, saving you thousands of dollars over the life of your loan.
So what exactly is a credit score? Where does this number come from? What counts most when it’s calculated? And what is “FICO” anyway?
FICO: A grade for your credit history
Credit is of course a way to buy goods and services now and pay later. As you use credit, you develop a credit history. Each of the three credit reporting bureaus — Experian, TransUnion, and Equifax — collect this information and use it to create a credit report.
Those reports show businesses that extend credit to you (creditors) how likely you are to pay them back. And they’re what FICO scores are based on. FICO (pronounced “Fie-co”) is the name of the data-analysis company whose scoring model most lenders use to crunch your financial information into a score. Thus “FICO score.”
The 5 factors that determine your credit score
Five factors determine your credit score, which can range from 300 to 850, but they’re not given equal weight. The pie chart below shows the breakdown.
1. Payment history | 35%
Do you pay your bills on time? That’s the best way to improve and maintain your credit. If you’ve missed any payments, get current and stay current.
2. Amounts owed | 30%
How much debt do you have? Lenders don’t want to see high credit card balances or too much of your income going to monthly debt payments.
3. Length of credit history | 15%
The longer the better. Simply being younger could knock a few points off your credit score. Having several inactive accounts can hurt you too.
4. New credit | 10%
Have you opened or applied for a new account recently? Opening too many new accounts in a short time usually hurts your score.
5. Credit mix | 10%
A good record of managing a mix of credit such as student loans, car loans, credit cards, etc. improves your FICO score.
The takeaway: For a healthy credit score, focus on paying your bills on time and keeping debt in check.
Seeing multiple, different scores?
If you’ve gotten your credit score from more than one lender, or you’ve obtained it online yourself, there might be discrepancies between the numbers. What’s going on, and does it matter? There are three possible explanations for this.
1. You actually have three different scores. Because many creditors don’t report to all three credit bureaus, your three reports can contain slight variations and therefore produce different FICO scores.
2. You might not have your real FICO score. If you obtained your score yourself for free, there’s a good chance that it’s based on a different scoring model. A FICO score will always say it’s a FICO score. And the only direct consumer access to FICO scores is through myFICO.com.
3. There could be mistakes in one or more of your credit reports. This is actually quite common and can matter a lot. Make sure to read up on how to find and fix mistakes on your credit reports well before you apply for a mortgage.
Which score do lenders use?
Most lenders look at all three, so they’ll probably be taking all of the above into account. The bottom line is to ask your lender about any differences that concern you. Is the lender looking at all three reports? Are variations affecting the interest rate on your loan? When you understand where your credit score comes from and how it's calculated, you can have an educated conversation with your lender.