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What Is A Credit Score

The higher your credit score, the more advantages you’ll have when you apply for a mortgage. Let’s look at how your credit score is calculated and what that means for you.

What Is A Credit Score?

Your credit score is the numerical representation of your credit history. It’s a three-digit number that expresses how consistent you are when you pay back debts.

Where Does My Credit Score Come From?

Your credit score is based on information the three major credit bureaus – Equifax, TransUnion® and Experian – collect about you from creditors. Creditors include companies you borrow from or make payments to. Your mortgage or student loan lender, your credit card company, your landlord and your utility company can all report information to the credit bureaus about how you make payments.

Your credit score comes from the information on your credit report. Credit reports are detailed summaries of your borrowing history. They show previous and current credit accounts and your payment history. When you apply for a loan, your lender uses your credit report and score to determine whether to lend you money.

There are many places where you can learn your credit score. You’ll probably find that your score changes depending on where you look. There are a couple of reasons for this:

  • Each credit bureau gets slightly different information about you based on which creditors report to them and what information they report.

  • The credit bureaus (and other companies that give you a credit score) use different calculations to determine your score. These calculations are known as credit scoring models. Many banks and lenders use the FICO® Score, but there are many other models available.

What Affects My Credit Score?

Your credit score is made up of several factors. These factors include payment history, types of credit, new credit, credit utilization and length of credit history.

Payment History

When a lender looks at your credit report, they want to see that you pay your debts back in full and on time. Your payment history has a strong influence on your credit score. It shows how consistently you pay off debt and make on-time payments. It also shows delinquent accounts and items like bankruptcies, judgments and liens. A poor credit history can have a significant negative effect on your credit score.

Types Of Credit

Credit diversity is another factor that’s considered in your credit score. A mixture of types of credit can positively impact your credit score because it shows lenders that you can successfully manage different types of debt. Establishing a mix of credit types (like credit cards, mortgages, personal loans, etc.) may raise your score slightly.  

New Credit

Opening a lot of new credit within a short period of time can signify to creditors that you’re risky. The less new credit that’s on your report at one time, the better. How you shop for credit has a small effect on your overall credit score.

Credit Utilization

Credit utilization refers to how much of your available credit you’re using. To find your credit utilization ratio, divide the total of your debts by the total of your available credit. A high credit utilization ratio may lower your credit score; creditors want to see that you’re not constantly hitting or exceeding your credit limit. Keeping your credit card balances low is important for maintaining a low credit utilization ratio.

Length Of Credit History

If you’ve made consistent and timely payments on your credit card for years, it’s easier to determine that you’re a reliable borrower. However, if you’ve made payments for only a few months, your ability to pay back debt isn’t as established. A longer credit history is generally better for your credit score.

What Is A Good Credit Score?

Most people consider “good credit” to be a score of 700 or above. When you’re applying for a mortgage, the credit score requirement varies by your lender and the type of loan you want. Below, we’ve outlined the minimum credit scores for each type of mortgage.

*Reprinted from Rocket Mortgage.

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