Home Shopping: How Your Credit Score is Calculated?
Understanding your score and how it affects your home purchase
A borrower with a credit score of over 700 offers better rates.
Knowing how your credit score affects the purchase of a home by those who are looking for a mortgage, it is imperative that they find their credit early. Your score plays an important role in the home buying process and in determining the interest rate the lender offers.
What is a Credit Score?
A credit score is the number lenders use to assess risk. Experience has shown them that loans with higher credit scores are less likely to default.
How are credit scores calculated?
Bonus results are generated by linking information from your credit report to software that analyzes it and extracts a number. The three major credit reporting agencies don’t necessarily use the same rating program, so don’t be surprised to find that the credit scores they generate are different for you.
What parts of credit history are the most important?
The pie chart above to the right shows the distribution of the approximate value that each aspect of your credit report adds to the credit score calculation. Use these percentages as a guide:
- 35% – Your payment history
- 30% – the amounts you owe
- 15% – The length of your credit history
- 10% – Types of loans used
- 10% – New loan
Payment History Contains:
- Number of bills paid by appointment
- Negative public records or collections
- Outstanding Bills:
- total number of items due
- how long have you been
- how long has it been since you had payments in arrears
What do you owe:
- How much you owe on accounts and types of accounts with balances
- How many of your revolving lines of credit you used – you are looking for indications that you are over-extended
- Amounts owed on loan accounts compared to their original balance – to make sure you pay them consistently
- Zero balance account number
Credit history length:
- The total time period that accompanied your credit report
- The length of time since the account was opened
- Time elapsed since last activity
- The longer your (good) history, the better the results
- Total number of accounts and type of account (installments, revolving, mortgage, etc.)
- A mix of account types typically generates better results than reports with only numerous revolving accounts (credit cards)
Your new credit:
- The number of accounts you recently opened and the percentage of new accounts in your total accounts
- Number of recent credit inquiries
- Time that has passed since recent research or recent accounts
- If you reinstated a positive credit history after facing payment issues
- In general, make sure you want to open a number of new accounts
Credit scoring software only considers the items on your credit report. Lenders typically look at other factors not included in the report, such as income, employment history, and the type of loan you are seeking.
What is a Good Credit Score?
The loans (usually) range from 340 to 850. The higher your score, the less risk it believes it will be. As your score drops, the interest rate offered to you is likely to drop.
Borrowers with a credit score of over 700 are typically offered financing options and better interest rates, but are not discouraged if your scores are lower as there is a mortgage product for just about everyone.
Here’s a look at credit scores among the US population in 2003:
- Up to 499: 1%
- 500 – 549: 5%
- 550 – 599: 7%
- 600 – 649: 11%
- 650 – 699: 16%
- 700 – 749: 20%
- 750-799: 29%
- Over 800: 11%
According to Penguin Value, the average credit score in America in 2016 is 695.
Your bank will extract credit reports and results from all major credit reporting agencies.
They are likely to use the intermediate score to work on your loan application. Ask your lender to explain what credit score will be used and how it will affect your loan application.