You've likely heard of the term "credit score," but how familiar are you with what it represents? Here is everything you need to become an expert at managing your credit.
A credit score is a three-digit number. It represents your credit history and tells the lender the likelihood of you repaying your debt. It includes factors like how long your credit has been open, how much credit you have, and how much of it you use.
The score also factors in whether you pay your bills on time. Whenever you apply for credit, such as when applying for a home loan, lenders and banks will use this number to decide if they will approve you for a loan. And if you get approved, this number will influence what the terms will be.
Your credit score is generated by the three main credit bureaus (Equifax, Experian, and TransUnion®) using a credit-scoring model. The most commonly used credit-scoring model is one developed by FICO®.
It’s based on several factors, like credit usage and available credit, but never on personal information such as race, gender, or ethnicity. Credit scores typically range from 300-850.
What is considered a "good" credit score can vary from lender to lender, but one thing remains the same --the higher your credit score, the better. A higher credit score tells lenders that you are low risk for defaulting on your loan and means that lenders likely to offer you more credit and better loan terms.
Most lenders consider credit scores over 670 to be good. A credit score above 740 is very good, and any score of 800+ is exceptional.
The FICO® credit-scoring model is considered industry-standard. Here's how it breaks down:
Your payment history is the most significant variable in FICO® scoring, making up about 35% of the total score. Payment history includes on-time and late payments.
The second most significant influencer is the amount you owe and how much available credit you have. It makes up about 30% of your overall score.
Length Of Credit History
How long you've had credit accounts for 15% of your FICO® score. The older your credit is, the higher your credit score will be.
Your credit mix, or the diversity of accounts, makes up about 10% of your FICO® score and includes things like car loans, lines of credit, credit cards, and retail accounts. The more variety of well-managed credit types, the higher your score will be.
10% of your overall score is new credit, mainly how many credit accounts you've recently opened. Too many newly opened credit accounts in a short period can lower your score.
Since there are different scoring models, it's possible to have more than one credit score.
There may also be times that one credit bureau will have more information than another because a creditor failed to report changes to all three credit bureaus. Thus, each bureau will score you differently.
Your credit score may also differ depending on the type of lender. For example, a mortgage lender will use a different credit-scoring model than an auto lender does.
As long as the scores are similar, there’s typically no reason to be concerned. However, if your scores vary considerably or there has been a notable change in your score, request a full credit report to investigate the discrepancy.
You can get a free copy of your credit report from each of the three major credit bureaus each year. Many financial institutions or credit card companies offer some sort of credit reporting as well.
Also, when you apply for a mortgage or refi with us, we will request a copy of your credit and review it with you.
Your credit score is one of the most powerful tools you have for getting approved for a home loan. But even struggling credit can get approved for a mortgage! Contact us today to see how much home you can buy and learn about government-backed home loans for borrowers with lower credit.