How Your Credit Score is Calculated
If you understand how your credit score is calculated, you not only gain insight into the overall process, but can start making strides to improving your overall score. After you apply for a mortgage loan, your lender will take a look at your credit score to help determine whether or not you are likely to qualify for the loan. If your credit score is too low, most lenders will not even move forward with the application process. Therefore, it is important for you to make sure your credit score is as high as possible before you apply for the loan. Before you can work toward improving your credit score, however, you first need to know more about how your credit score is calculated.
What Factors are Used to Calculate Your Credit Score?
Your credit score is based on data collected from five different categories. These categories include:
- Payment History – based upon whether or not you have paid your bills on time
- Amounts Owed – owing money on loans is not necessarily bad, but owing an excessive amount can reflect poorly on your score
- Length of Credit History – a longer credit history is more desirable than a short or non-existent history
- New Credit – opening several accounts within a short period of time will typically result in a lower score
- Types of Credit Used – a variety of loans and accounts, such as installment loans, credit cards and retail accounts is better than all of the same types of accounts
Both positive and negative information is collected from each of these categories and is used to determine your overall score.
Where is the Information for These Categories Collected?
The information from each of these categories is collected from your credit report. The information on your credit report is gathered from public records as well as from the information that is reported by lending institutions. Each time you apply for a loan, the information that you include on your application is shared with the credit reporting agencies. When you are approved for a loan or credit card, this information is also sent to your credit report.
How Much Emphasis is Placed on Each Category?
The importance of each of these categories varies from one person to the next. This is because the score is based on the overall information that is collected from your credit report. Therefore, one of the categories may actually have a bigger impact on your score than another category. For this reason, it is impossible for you to know for sure how much a single factor will impact your credit score. Generally speaking, however, the guidelines are as follows:
- Payment History – 35%
- Amounts Owed – 30%
- Length of Credit History – 15%
- New Credit – 10%
- Types of Credit Used – 10%
When applying for a mortgage loan, it is important to remember that your credit score is not the only thing that lenders consider. They also consider areas that do not impact your score, such as length of employment and market data. Therefore, simply having a good credit score does not guarantee loan approval. Without a good credit score, on the other hand, you are very unlikely to be approved for a mortgage loan. Hence, understanding how your credit score is calculated is important to knowing how the entire process works.