How is Your Credit Score Calculated?

13 05 2010

Understanding Your Credit Score and How it Affects Buying Real Estate

Credit score plays an important part in the home buying process because it determines the interest rate and mortgage terms that a lender is willing to offer you.

What is a credit score?

Everyone has a credit score which is a number that lenders use to estimate perceived risk. Credit score is the rating that determines how “well” you pay your loans. Borrowers with higher credit scores are less likely to default (miss a payment) on a loan (credit card, mortgage, car loan, etc).

How are credit scores calculated?

Credit scores are generated by looking at your credit history and other data from your credit report, analyze it and then generating a number. Credit reporting agencies have been keeping track of how well you pay your bills (credit cards, phone bills, car payments, etc.).

Which parts of my credit history are most important?

A general breakdown of what your credit score is composed of. The value of each aspect in your credit report determines your credit score as a whole.

    • 35% – Your Payment History (How well you have been paying your bills, any missed payments?)
    • 30% – Amounts You Owe (How much credit you have available, how much do you owe?)
    • 15% – Length of Your Credit History (Did you just move into the country? Do you have bills under your name?)
    • 10% – Types of Credit Used (Credit card, mortgage, car loans)
    • 10% – New Credit (When was the last time you applied for credit?)

Payment History

Includes:

  • The number of accounts paid accordingly and on time
  • Any negative public records? Has your account gone to collections?
  • Delinquent accounts:
    1. the total number of items you have past due
    2. how long you’ve been past the due date
    3. how long it’s been since your last payment past due

Amount You Owe:

  • How much you owe on accounts and the types of accounts with balances past due
  • How many revolving credit lines you’ve used, how big of a balance are you carrying? (Any indications you are over extending your credit)
  • Amounts you owe on outstanding loans compared to their original balances. Are you paying the loans down consistently?
  • Number of active accounts with no balance

Length of Credit History:

  • How long is your credit history? Total length of time tracked by your credit report
  • Length of time since your last accounts were opened
  • Amount of time that’s passed since the last activity
  • The longer your accounts are in good standing (credit history), the better your credit score

Types of Credit:

  • Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
  • A combination of different account types usually generates better credit scores than reports with only numerous revolving accounts (ie. credit cards)

New Credit:

  • Number of accounts you’ve recently applied for and the proportion of new accounts to total accounts
  • Number of recent credit inquiries (applications for credit, loan, etc)
  • The amount of time since recent inquiries or newly-opened accounts
  • If you’ve re-established a positive credit history after encountering payment problems (Bankruptcy)
  • Checking to make sure you aren’t credit seeking by trying to open numerous new accounts

Credit scoring only considers items on your credit report. Lenders generally look at all factors including those not in the report, such as income, employment history and the type of credit you are seeking.

What’s a Good Credit Score?

Credit scores usually range from 340 to 850. The higher your score, the better you are at paying your bills, the less risk a lender believes you will be, the better the interest rate you will be offered.

Don’t be discouraged if your scores are lower, because there’s a mortgage product for almost anyone.

Multiple Credit Scores

Your bank will pull credit reports and scores from the major credit reporting agencies. They’ll probably use your average credit score to work your loan application. Ask your lender to explain which credit scores will be used and how they affect your loan application.

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One response

15 05 2010
vungtaustock.com

Your article is very very nice and helpful

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