One of the 4 factors used to determine your eligibility for a mortgage is your Credit Score. In this article, I’ll discuss what a credit score is and what impacts your score.
The Fair Credit Reporting Act defines a credit score as “a numerical value derived from a modeling system used to predict the likelihood of default.”
What Influences your Credit Score?
In other words, consumer credit scoring models, such as FICO, rank consumers using a 300 to 850 credit score range. The score is used to rank higher-risk borrowers from lower-risk ones. When you have a higher credit score, lenders view you as a less risky borrower; A lower credit score indicates an increased risk to the lender. Your credit score is determined exclusively on the information found on your credit report.
Credit Score Factors
There are 5 key factors that determine your credit score:
Credit History Length
Payment history is the most important ingredient in credit scoring, making up 35% of your FICO Score. and even one missed payment can have a negative impact on your score. This makes sense, lenders want to be sure that you will make regular payments when they are considering you for new credit.
Amounts owed is the second highest consideration, making up 30% of your FICO Score. This is referring specifically to your credit usage, or credit utilization ratio. This figure tells lenders how much of your available credit you're utilizing; Using more than 30% of your available credit is a negative to creditors.
Credit history length is how long you've held credit accounts, making up 15% of your FICO® Score. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores.
Credit mix is how diverse your portfolio of credit accounts and makes up 10% of your FICO Score. Maintaining a car loan, credit card, student loan, mortgage, or other credit lines tells lenders how well you can manage a wide range of products. Credit mix accounts for 10% of your FICO® Score.
Finally, there is New credit, which is the number of credit accounts you've recently opened or applied for, and makes up the last 10% of your score. Too many new accounts or inquiries in too short of a timeframe can indicate increased risk, and therefore decrease your credit score.
Credit Score Conclusion
Thats it! Those are the 5 determining factors that make up your credit score! Check out some of my other articles to learn how to improve your credit and get approved for a mortgage to buy your first home :)