Your credit score is a number lenders use to determine the risk of lending to you. Credit card companies, auto dealerships and mortgage bankers are a few of the type of institutions that will assess your credit score before deciding if and how much they are willing to lend you and at what interest rate.
The three credit agencies – Experian, Equifax, and TransUnion – compile credit scores, also known as FICO® scores, based on the information in your credit file, which is affected by these five factors:
Payment History – 35%
Are you making your payments on time? This is the most important component of your credit score. Payment history is an indication of your ability to repay money that is lent to you. Payment history considers credit cards, retail accounts, installment loans and mortgage loans.
A few late payments do not automatically destroy your credit score if your overall history is good, but your FICO® score considers how late your payments were, how much was owed, how recently they occurred and how many late payments there were.
Amounts Owed – 30%
How much do you owe on your credit accounts? Owing money doesn’t necessarily mean that you are a high-risk borrower, but when a high percentage of your credit lines are in use or “maxed out”, this can indicate a borrower who is financially overextended and more likely to miss a payment.
Your FICO score also considers the amounts you owe on specific types of accounts, such as credit cards and installment loans. Installments loans are reviewed by the amount of money that was loaned compared to the amount that has been paid.
Having a low credit utilization ratio usually results in a higher FICO® score.
Length of Credit History – 15%
Typically, a longer credit history will increase your credit score, though it is highly variable on the above-mentioned factors. Your FICO® score takes into account how long your credit accounts have been established, including the age of your oldest and newest accounts and an average age of all of your accounts, how long specific types of credit accounts have been established and how long it has been since you used certain accounts.
Types of Credit in Use – 10%
FICO® scores are affected by the types of accounts you have, such as credit cards and installment loans. Do you have experience with both revolving credit (credit cards and retail accounts) and installment accounts (car loans and mortgages) or have you been limited to one type?
Your FICO score will reflect the number of accounts you have open. There is no perfect amount of credit accounts, as it will vary person to person based on their overall credit picture.
Keep in mind that a closed account will still show up on your credit report and the history with that lender is still considered by your FICO® score. Even if it’s a card you do not use anymore, typically it’s a better idea to leave it open with a zero balance.
New Credit – 10%
Research shows that borrowers who open or apply for multiple credit accounts in a short time period are riskier borrowers. Your FICO® score represents how you shop for credit.
When a lender makes a request for your credit report or score, it is called an inquiry. When you shop for credit, inquiries remain on your credit report for two years, though FICO® scores only consider inquiries within the last 12 months. Applying for multiple lines of credit in a short amount of time can affect your credit but the impact varies from person to person based on their credit histories. It is generally a good idea to refrain from opening new accounts before applying for financing for a large purchase, such as home financing.
What Makes Our Credit Check Different
If you are wishing to make a home purchase now or in the near future, don’t rely on the scores given by online credit checks. When Compass Mortgage runs your credit score, we gather all three FICO® scores from Experian, Equifax and TransUnion. We then take the median score of the three to represent your score throughout the mortgage process.
Online credit checks typically only represent one of your three scores and could misrepresent where your credit stands for mortgage financing. Only knowing one of your scores could mislead you to think that your median credit score is higher or lower than it actually is.
If you are interested in making a home purchase in the near future, download our Mortgage 101 Handbook for a go-to reference on the home buying process.
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