January 10th, 2019 10:58 AM by Michele Morse Reen
You’ve heard about credit scores and know that they are considered important, but why should you care about your credit score? Your credit score is looked at for multiple reasons - sometimes by employers, landlords, your bank, but also anytime you apply for a loan, including a home loan. Understanding credit scores and how they’re calculated will help you check into and improve your own score so you can have better credit when you are ready to purchase or refinance your home.
The most common credit score used is called your “FICO™” score, standing for Fair Isaac Corporation. FICO™ scores were first used with lenders in 1989. This score can affect how much a lender will loan you and at what interest rate. The score is calculated using information contained in your credit reports with each of the three main reporting agencies.
While the exact formula is unknown, we do know that FICO™ scores are calculated by considering five different categories. The importance of each varies as well as the factors within every category:
Payment History - Weight: 35%
Have you paid past credit accounts on time? How many accounts have late or missed payments?
Amounts Owed - Weight: 30%
How much do you owe on your credit accounts and how many accounts do you have? How much of your total available credit are you currently using?
Length of Credit History - Weight: 15%
How long have your credit accounts been established? How long has it been since you last used some of those accounts?
Credit Mix in Use - Weight: 10%
What types of credit accounts do you have? How many different types of credit accounts are you using?
New Credit - Weight: 10%
How many new accounts or recent inquiries do you have? How long has it been since you opened a new account?
These are general guidelines of what is considered and can vary from person to person according to what information is contained in their credit profile.
Base FICO™ scores range from 300-850. Lenders have different definitions of what range of scores are considered “good” or what scores will receive better programs and rates. In general though, this range represents what the different scores mean:
800 +: Exceptional
740-799: Very Good
< 580 : Poor
Even if your credit score is not in the good or higher range, there are still plenty of loan programs that you may qualify for. Talk to APM about our minimum credit scores for certain loans and other specialty loan programs that may be a fit for your situation.
Once you understand how your credit score is calculated, there are things you can do to improve your score. Here are some easy ways to make a positive impact:
Keep your credit score healthy and ready for that upcoming home purchase by avoiding anything that negatively impacts your credit score.
APM has you covered with all you need to know about your credit score and getting ready to start your homeownership journey. Check out the following for further information about credit scores: