Credit Tip Of The Week: Credit Score Breakdown



Credit scores range from 300 to 850, with 850 being the best possible credit score. According to FICO, five different categories of information are used to calculate your credit score: Payment history, credit utilization, length of credit history, mix of credit and new credit.

Payment History

Your payment history is based on the payments you have made to credit accounts in the past. It is the single most important factor used in determining your credit score and accounts for 35 percent of the overall result. Account types considered in this part of the calculation include mortgages, auto loans, retail accounts and credit accounts. This part of the calculation also includes judgments, foreclosures, bankruptcies and other serious financial issues.

Credit Utilization

“Credit utilization” refers to the percentage of your available credit that is currently in use. The higher this percentage is, the more your credit score will drop. Using a large percentage of your available credit is considered poor debt management, and potential lenders see it as a warning sign that you may have trouble making payments if they extend you more credit. Credit utilization accounts for approximately 30 percent of your credit score.

Length of Credit History

The length of your credit history shows lenders how long you have been using credit. This part of the calculation considers the age of each of your accounts individually, as well as the average age of all accounts. The longer your credit history, the higher your score will be. Length of credit history accounts for 15 percent of your credit score.

Mix of Credit

In general, it’s best to have a variety of credit types, along with some accounts that are not currently in use. Different types of credit considered include installment loans, mortgage loans, finance accounts, retail store accounts and credit cards. Your mix of credit accounts for 10 percent of your credit score.

New Credit

FICO reports that opening several new accounts in a short period of time indicates a higher credit risk. Thus, if you open multiple new credit accounts quickly, your score may fall. New credit accounts for the remaining 10 percent of your overall score.



How Does Your Credit Score Affect Your Mortgage Interest Rate?

The better your credit score, the better your mortgage rates.

While this rule of thumb is fairly common knowledge, most people are unaware of just how much savings homeowners can experience over the term of a 15- or 30-year fixed-rate mortgage with even the most seemingly marginal difference in interest rate. For example, a mortgage rate of 3.75 percent, compared to a lower 3.5 percent rate, would likely cost a homeowner over $40 more a month – or about $500 more per year. If you multiply $500 by 30, that hypothetical consumer is paying about $15,000 more over the course of a 30-year mortgage than a consumer whose rate is only 0.25 percent less. That’s how big the difference can be between an excellent credit score and just a good credit score.

Yes, your credit score can wind up costing you – or saving you – a lot of long-term money when it comes to your mortgage.

Why Your Credit Score is Key

Would you want to lend money to a friend or family member who has a history of never paying people back? Lenders are in the same boat – and that’s why so much weight is put on your credit score during the mortgage loans application process. A good credit score tells lenders that you’re a responsible, reliable consumer with a track record of making on-time payments. A poor credit score can signify the opposite.

When there’s less risk with a consumer, lenders are more apt to do business with them and approve a loan with a low rate. However, when there’s more perceived risk, lenders throw in the caveat of a higher rate if the particular consumer is even approved for a loan in the first place.

What Are the Best Scores for Conventional Mortgages?

The higher the score, the lower your rate. That said, a FICO score of 720 usually puts consumers in excellent standing where they’re able to qualify for the lowest rates. Between 700-720 is considered good standing, where rates are still favorable, but not as low, and 680 is in the average range where rates are likely to be higher. Anything below 680 and you may be hard-pressed to get approved for a conventional mortgage.

If your score is short of the excellent mark, we’d recommend that you do some credit repair in order to get your score up where you can qualify for a lower rate. Though you may be chomping at the bit to buy a home now, the long-term savings of potentially tens of thousands of dollars can’t be dismissed. Here’s how to improve your credit score:

  • Improve your debt-to-credit ratio: Keep your credit card debt within 30 percent of your total credit limit. Anything higher and your score can take a hit.
  • Make all payments on time.
  • Pull your credit report and analyze it carefully for errors. It’s estimated that over 20 percent of all credit reports have some sort of error. Dispute any that are on your report.
  • Pay off high-interest credit cards before low-interest ones.
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P.S. Here is a great article discussing how credit works.

How Does Credit Work?

Credit history Rating Scale: Exactly how It Is Done and also Just what It Does To You

The original credit scoring formula was created by Fair Isaac & Company, or FICO as they are referred to. Today there are hundreds of different algorithms that calculate risk but FICO is still the primary company. Below you fill find some “ins and outs”. If you find this a little confusing I would suggest a call into our team. Let us break down how these factors affect your score.

Your credit rating record is an essential record that lenders, particular property managers as well as specific firms will take a look in order to determine your reputation. For financial institutions and credit card companies, they take a look at your credit rating past in order for them to establish if you are an individual that pays bills punctually. This implies that when you secure a credit rating or a lending card, banks, lenders, and bank card companies will certainly determine if you will be accepted for the funding or the credit card or not by just examining your credit past as well as having a look at your credit report.

It is really essential for you to understand exactly what a credit report rating in fact implies to you and your future. Not lots of Americans understand exactly what a credit rating is. A bad credit report score will certainly mean the rejection of acquiring accepted for a phone line in your very own house.

Of all, lenders, such as financial institutions, lenders, and the credit card company will certainly make records regarding your credit report history to credit reporting companies. If you do not pay your expenses punctually, the lenders will certainly be making adverse guides and send them to credit report reporting firms. This will injure your credit history.

It is crucial for you to keep in mind that your credit rating isn’t static. Your credit report score or your credit history rating adjustments all the time.

You can purchase it via the three major credit bureaus in the United States if you don’t know just what your credit report score is. The credit card guide can be gotten for free each year. You could buy all of it simultaneously in order to compare it as well as detect some mistakes that might be harming your credit score.

By doing this, you will certainly have the ability to examine your credit report before you secure a credit or a lending card. This will certainly additionally add to a bad credit record if you used for a credit history or a loan card if you have a bad credit history score.

So, it is extremely important for you to learn about your credit report prior to you even think of making an application for a loan.

Constantly remember that having an excellent credit history will certainly suggest getting great apartments, acquiring several of the fundamental needs, such as a phone line in your house, acquiring the most effective finance bargains, as well as obtaining the best bank card deals.

By having a great credit report, you will increase your opportunities of getting financings and other economic possibilities that could cross your road in the future. Constantly keep in mind that your credit history indicates a lot in today’s society. Maintaining a good credit report ranking nowadays is a must.

For bankings as well as credit report card business, they look at your credit record in order for them to identify if you are a person that pays costs on time. This implies that when you apply for a financing or a credit card, financial institutions, creditors, and credit rating card firms will certainly identify if you will be authorized for the financing or the credit rating card or not by just examining your credit rating past and also taking a look at your credit rating rating.

Of all, creditors, such as financial institutions, lenders, and also the credit report card business will certainly make guides regarding your credit report past to credit reporting agencies. Your credit report rating or your credit history score changes all the time. If you do not understand exactly what your credit history score is, you can order it with the 3 significant credit history bureaus in the United States.

For additional information on how to repair your credit, please contact our office at 617-265-7900 or request a free consultation below.