What Your Credit Score Says About You
August 23, 2022
What is a Good Credit Score?
Think of your credit score like grades you get in school. A higher grade means that the work you turned in was on time and of higher quality. It measures your academic performance. Your credit score measures your creditworthiness, and you are graded bases on a number of factors, and credit bureaus calculate it on a scale between the range of 300 to 850.
The higher this score is, the more lenders will trust you. A high score represents a borrower who makes repays loans and makes his payments on time, making you less of a risk in the eyes of lenders, giving them more incentive to grant you credit with a lower interest rate.
What Goes into Your Credit Score?
One of the main credit scoring formulas used in the U.S. is the FICO score. All major credit bureaus in the U.S.—Equifax, Experian, and TransUnion—calculate credit scores using FICO's algorithm and information they have collected about people's credit history. It is based on five factors: timely payments (35%), total debt (30%), the age of credit (15%), new credit (10%), and the type of debt (10%). Let’s talk about each of the aspects.
Timely Payments: The first factor is easy enough to understand; to be considered creditworthy, you need to make payments on your loans on time. This can mean making your mortgage payment on time, and even your credit card balance.
Total Debt: Your total debt, which affects 30% of your score, is the amount of money you owe, relative to your credit limits. The more you owe, the riskier it is for you to take on new debt, lowering your credit score.
Age of Credit: Having a longer, more established credit history is advantageous because it gives lenders more information about your spending habits. A longer history of reliable borrowing means your score will be higher.
New Credit: This refers to lines of open credit. If a borrower has opened a number of new credit lines in a short amount of time, it indicates to lenders that they are having financial trouble and cannot manage their money well.
Type of Credit: This is especially helpful for new borrowers who don’t have a long credit history. It helps to have different types of credit lines because it shows lenders that you are able to handle various finances.
While it is good to know what goes into your score, you also need to know what doesn't affect your credit rating. While credit applications can affect the score, "soft" credit checks do not. The score is not based on sex, race, marital status, religion, nationality, or age. Information about where you live, your job, salary, or the interest rates on your credit accounts is not factored into the score either.
------------------------------
RELATED VIDEOS:
You're Almost There When You Get Your Loan Approval
Learn About the Mortgage Insurance Premium (MIP)
Pre-approval Starts the Mortgage Process
FHA Loan Articles
December 10, 2024The FHA announced increased loan limits for 2025, providing those seeking FHA-insured mortgages after January 1st with increased purchasing power. In this article, we explore the key aspects of these limits and their implications for your homeownership goals.
When you are approved for an FHA-insured loan, the FHA guarantees a portion of the loan to the lender, lowering lender risk...
December 9, 2024The Federal Housing Administration (FHA) helps people buy homes, especially those buying for the first time or who might not have perfect credit. In 2025, there is good news for FHA borrowers. FHA home loan limits are going up.
In most places, the FHA loan limit for a single-family home in 2025 is $524,225. This is more than it was in 2024. However, in expensive areas, where houses cost more, the limit can be as high as $1,209,750.
December 5, 2024The Federal Housing Administration (FHA) has some ground rules regarding cash-out refinances. These rules are designed to protect both you and the lender, ensuring you have enough ownership of your home and reducing the risk of foreclosure. How long must you own your home before you can apply for FHA cash-out refinancing?
December 4, 2024When you think about owning a farm, do you dream of vast landscapes and thriving agricultural enterprises? Or are you looking for a quaint farm-style house to live in but not necessarily to start a new farming career?
Borrowers who want to buy a farm residence are in luck with the FHA loan program, which includes options to purchase farm residences.
November 27, 2024If you are new to the home loan process, you may wonder how your loan officer will interpret your application data. How lenient is the lender with issues related to debt, credit utilization, and related factors? We examine some key points, but remember that what follows is not financial advice. Always consult a finance or tax professional for the most current information.
