Breaking Down your Credit Score

Your credit score lets lenders and other institutions know, at a glance, about your borrowing behavior and your ability to repay your debts. As a result, the score can greatly affect your choices and opportunities when it comes to purchasing a large item…such as a home. Having a good credit score can affect the size of the down payment you make, the conditions of the mortgage payment schedule, and possibly whether you are even approved for the loan at all. While you might understand the basics of a credit score—which ranges from 300 to 850—and how it can affect your buying decisions, you might not be aware of how that score is calculated.

The exact methodology of a credit score cannot legally be released to the public, but credit reporting bureaus do allow an approximate breakdown:

Payment history – 35%

This element of the credit score is given the most weight, since your payment history expresses how responsible you have been about paying bills on time. Late payments or, in worst cases, notices of collection and bankruptcy, will all lower your score. Payment history also reviews how recently certain behaviors have occurred—late bill payments will be considered more negatively when they happen more recently.

Outstanding debt – 30%

The greater your current debt—including credit cards at their limits or other monthly bills for large items—the lower your credit score will be. Having significant debt will make lenders wary of adding more.

Established credit history – 15%

Your credit score improves the longer you have had established credit. A longer history is more useful for credit reporting, since there is a larger volume of past data to use for predicting future behavior.

New credit – 10%

Receiving new credit, such as a loan or new credit card, will temporarily lower your credit score. This element of the score is also a record of inquiries into your credit rating—mortgage lenders constitute a so-called “hard inquiry” that will lower your score (as opposed to personal inquiries, which have no effect). The score does count multiple hard inquiries that occur within a brief period of time as a single inquiry, so as not to penalize loan shopping.

Types of current credit – 10%

Showing a familiarity with several different types of credit is a positive on your credit score.

Knowing this breakdown can help you strategize the best ways of keeping your score in good standing—for example, paying your bills on time and maintaining a lower total debt balance are clearly the most effective ways to improve your credit rating.

Alex Margulis is a top Mortgage Banker with PERL Mortgage. He has built his business on principles of transparency, trustworthiness, and honesty; and believes strongly in treating his clients as he would want to be treated. You can contact him via email or find out more about him through his website.