What’s in a credit score?
March 16, 2017
As a homebuyer, you know you need a healthy credit score to qualify for a mortgage loan. A better credit score typically gets you a better interest rate too, saving you thousands of dollars over the life of your loan.
But do you know how your credit score is calculated?
It’s National Credit Education Month, so all the more reason to find out. Most lenders rely on an organization known as FICO to summarize financial information from all your creditors and then create a credit score for you. Five factors determine this “FICO score,” but they’re not given equal weight. The pie chart below shows the breakdown.
The takeaway? For a healthy credit score, focus on paying your bills on time and keeping debt in check.
The five factors
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.