How is Your Credit Score Calculated?

When applying for a mortgage loan to purchase a home, a number of different factors will be taken under consideration by your lender. For most, the most important of these factors will be your credit score. Understanding how your credit score is calculated will give you a good idea of what to expect when you see yours while also helping you to determine how you can help yourself obtain the best score possible. To that end, here is a look at the categories that are weighed when calculating your credit score.

Payment History

Your payment history accounts for 35 percent of your credit score. Your payment history is a reflection of your timeliness when it comes to paying your bills. If you have consistently paid your bills on time, the payment history portion of your score should be excellent. If you have been struggling with getting your bills paid on time, make it a priority to establish a better payment history before you apply for a mortgage loan. If necessary, contact your creditors and try to renegotiate new payment terms so you can afford to make your payments on a consistent basis and in a timely manner.

Amounts Owed

The amount of debt that you currently have will also be reflected in your credit score. If you owe a significant amount of money, you will be considered a higher risk. When calculating the amount owed, the amount of credit that has been extended to you will also be taken into consideration. If you have a lower debt-to-credit ratio, your credit score will not be hit too harshly. For example, someone with $6,000 in credit who owes $5,000 will be more negatively impacted than someone with $30,000 in credit who owes the same amount. Amounts owned accounts for 30 percent of your overall score.

Length of Credit History

Your length of credit history accounts for 15 percent of your score. The longer you have held credit in good standing, the better your score will be. Therefore, while it may be tempting to cut up a credit card that you have had for many years, it is actually in your best interest to hang onto that card and to use it periodically in order to maintain your history with that card.

Types of Credit

Your credit score will be helped by having a mixture of different types of credit, such as credit cards, installment loans, finance company accounts, retail accounts and mortgage loans. This doesn’t mean that you should open new accounts simply to achieve a mix of different types of credit, but it does indicate you will receive a better score if you have a history with various types of accounts. Credit mix is 10 percent of your score.

New Credit

Opening a new credit account or opening several different accounts within a short period of time can have a negative impact on your score. Therefore, if you plan to apply for a mortgage soon, it is best to hold off on opening new accounts until after you have applied for and been approved for a loan. New credit accounts for 10 percent of your credit score.

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