How Your Credit Score is Calculated
by Janet Wickell
Understanding Your FICO Score and How it Affects Home BuyingHome buyers who are seeking a mortgage find out early-on that their credit score plays an important part in the home buying process and in determining the interest rate that a lender offers.
What is a credit score?
A credit score is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan.
How are credit scores calculated?
Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't necessarily use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different.
Why are credit scores sometimes called FICO scores?
The software used to calculate a great number of credit scores was created by Fair Isaac Corporation--FICO.
Which parts of a credit history are most important?
The pie chart above right shows a breakdown of the approximate value that each aspect of your credit report adds to a credit score calculation.
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35% - Your Payment History30% - Amounts You Owe15% - Length of Your Credit History10% - Types of Credit Used10% - New Credit
Your Payment History Includes:
Number of accounts paid as agreed
Negative public records or collections
Delinquent accounts:
total number of past due items
how long you've been past due
how long it's been since you had a past due payment
What You Owe:
How much you owe on accounts and the types of accounts with balances
How much of your revolving credit lines you've used--looking for indications you are over-extended
Amounts you owe on installment loan accounts vs. their original balances--to make sure you are you paying them down consistently
Number of zero balance accounts
Length of Credit History:
Total length of time tracked by your credit report
Length of time since accounts were opened
Time that's passed since the last activity
The longer your (good) history, the better your scores
Types of Credit:
Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards)
Your New Credit:
Number of accounts you've recently opened and the proportion of new accounts to total accounts
Number of recent credit inquiries
The time that's passed since recent inquiries or newly-opened accounts
If you've re-established a positive credit history after encountering payment problems
In general, checking to make sure you aren't attempting to open numerous new accounts
Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren't included in the report, such as income, employment history and the type of credit you are seeking.
What's a Good Credit Score?
Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.
Borrowers with a credit score over 700 are typically offered more financing options and better interest rates, but don't be discouraged if your scores are lower, because there's a mortgage product for nearly everyone.
Here's an 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%
Multiple Credit Scores
Your bank will pull credit reports and scores from all three major credit reporting agencies: Transunion, Equifax and Experian. They'll probably use the middle score to work your loan application. Ask your lender to explain which credit scores will be used and how they affect your loan application.

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