What goes into your credit score?
Your credit score affects the mortgage you qualify for. Find out the five factors that go into it.
Credit scoring can seem overwhelming. But it doesn’t have to be. Knowing which five categories are used to calculate your credit score can make understanding it much easier. This information can also give you insight into how to sustain your score if it’s in the “healthy” range—or how to take simple steps to strengthen it.
It’s also possible that homebuyers may soon see their credit score improve. Equifax®, Experian®, and TransUnion®—the three credit reporting agencies in the U.S.—recently announced changes to how medical collections debt will be reported. Why the changes? Medical collections debt isn’t viewed to be a reliable indicator of credit behavior.
After July 1, 2022, paid medical collections debt will drop from credit reports, and the time frame in which unpaid medical collections appears will increase from six months to one year. Medical collections under $500 also won’t appear on credit reports after 2022; this reflects most of the medical collections reported. Overall, nearly 70 percent of medical collections debt may be removed.
This joint action is intended to offer consumers more time to pay down medical debt and, ideally, keep it from appearing on a credit report altogether. The change is expected to help millions carrying a total of $88 billion in medical debt, with positive effects extending to homebuyers too. You can request a free weekly credit report here through the end of the year or contact your Loan Officer to learn how these changes may benefit you.
Homebuyers, especially first-time homebuyers, often wonder about how their credit score affects the homebuying process. If this rings true, it can help to review some of the basics:
- Your credit score is a three-digit number on a scale of 300 to 850.
- Generally, scores that are 700 or above are considered good, and scores between 750 to 800 are considered excellent.
- Scores of 550 to 580 or below are considered very poor, but there are strategies to bring your score up.
- Your credit score (a three-digit number) is different from your credit report, which details what factors went into the equation that resulted in your score.
What credit score do you need to get a mortgage? There’s no clear-cut answer to this question because different loan programs have different requirements. A credit score as low as 580 may potentially qualify you for an FHA Loan, and there’s no minimum credit score for VA Loans.* You may also be able to qualify using non-traditional types of credit—rent, utility, and car insurance payments are some examples.
If you’ve never opened a credit card or taken out a loan, you may not have a credit score, meaning you’re “credit invisible.” This can make taking out a loan challenging but not impossible. The best thing to do is to ask your Loan Officer about your options.
The 5 categories that make up your credit score
Which five factors are used to determine your credit score? Here’s a quick breakdown:
Here's a closer look:
Payment history (35 percent).
You might have heard of credit utilization. It’s the amount you owe in contrast to your total credit limit. Credit utilization (or debt utilization) basically describes how much you owe compared to the amount you can borrow. It’s a good practice to maintain your credit balance at no more than 50 percent of your credit limit—but 30 percent is even better.
Keep in mind that: A lower credit utilization positively impacts your score, even more than not using any credit. You can help to lower this ratio by asking your credit card provider to increase your credit limit.
Amounts owed (30 percent).
You might have heard of credit utilization. It’s the amount you owe in contrast to your total credit limit. Credit utilization (or debt utilization) basically describes how much you owe compared to the amount you can borrow. It’s a good practice to maintain your credit balance at no more than 50 percent of your credit limit—but 30 percent is even better.
Keep in mind that: A lower credit utilization positively impacts your score, even more than not using any credit. You can help to lower this ratio by asking your credit card provider to increase your credit limit.
Length of credit history (15 percent).
The longer your credit history, the better this looks in the eyes of a lender. A lengthy history can support your trustworthiness as a borrower and skew your credit score higher. Conversely, opening new lines of credit can temporarily drag your score down within the first six to 12 months; this is why your Loan Officer may caution you not to open any new accounts when applying for a mortgage.
Keep in mind that: If you’re “credit invisible” and would like to prepare to qualify for a mortgage, it may help to open a few credit accounts in advance, use them responsibly, and pay off the monthly balances.
Don’t let so-so credit stop you from achieving your dream of buying a house. Let us help you find a solution.
Credit mix (10 percent).
Having a variety of credit accounts also looks good to a lender because it shows you can manage your finances. A “healthy mix” might include several credit cards, a retail card, a car loan, and a mortgage. Note that taking out an excess of credit cards in your name isn’t necessarily ideal. Aiming for three to five credit cards that you rotate and can pay off is optimal.
Keep in mind that: Given that your credit mix only makes up 10 percent of your score, it may not be worth your energy to focus on diversifying your credit. If you want to strengthen your score, paying off overdue bills is likely to provide a bigger reward.
New credit (10 percent).
As mentioned, opening a lot of new accounts in a short window can seem risky. This influx of new credit inquiries—which show up on your credit report for 120 days—may indicate you’re carrying a disproportionate amount of debt. A hard inquiry occurs when you apply for new credit (like a credit card or mortgage) and differs from a soft inquiry, occurring when a company you already borrow from accesses your credit.
Keep in mind that: A hard pull on your credit report can lower your score, while a soft pull doesn’t. When you’re in the process of applying for a mortgage, multiple hard mortgage inquiries will be seen as one if they’re pulled within 45 days.
If your credit score needs some TLC:
We’re here to lend a hand. Connect with an Academy Loan Officer to find out exactly how much house you can afford based on your current score—and which short-term credit-boosting tips could help make your dreams of homeownership possible.
*Instead, VA requires a lender to review the entire loan profile to make a lending decision. Please consult a trusted professional as personal circumstances may vary. Corp NMLS 3113 I Equal Housing Lender. MAC623-1481896.