Learn the basics of credits scores and what they mean to your financial situation. Find out which part of your credit report can affect your interest rate. Then, read up on home loans that fair well in even low credit climates, like FHA Express.
What Determines My Credit Score?
The five main factors that determine your Credit Score are:
Payment History (approximately 35% of your score)
The factor that has the biggest impact on your score is whether you’ve paid past credit accounts on time. However, an overall good credit picture can outweigh a few late payments which will continue to have less impact over time unless the late payment is a mortgage payment.
Amounts Owed (approximately 30%)
Having credit accounts and owing money doesn’t mean you’re a high-risk borrower. But owing a lot of money on numerous accounts can suggest that you are financially overextended and may be more likely to make some payments late or not at all. Part of the science of scoring is determining how much debt is too much for a given credit profile.
Length of Credit History (approximately 15%)
In general, a longer credit history will increase your credit score because it shows that you can responsibly manage your available credit over time. However, even people who have not been using credit very long may get high scores, depending on how the rest of their credit report looks.
New Credit (approximately 10%)
People today tend to have more credit and to shop for credit more frequently. But opening several credit accounts in a short period of time can represent greater risk – especially for people with short credit histories. Requests for new credit can also represent greater risk. However, credit scores are able to distinguish between a search for many new credit accounts and rate shopping. FICO scores generally do not equate your rate search with higher credit risk.
Types of Credit in Use (approximately 10%)
Your credit score will reflect a combination of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. While a healthy mix will improve your score, it is not necessary to have one of each, and it is not a good idea to open credit accounts you don’t intend to use. The credit mix usually won’t be a key factor in determining your score, but it will be more important if your credit report doesn’t have much other information on which to base a score.
You can read more about the factors that affect your credit score in the Guide to Managing Your Credit.
Interpreting Your Credit Score: What’s Good and What’s Bad?
A high – or “good” – credit score can be in the mid-700s and higher. If you are below this range, however, your credit score will list up to four reasons why your score is not currently higher, and whether your credit report might contain errors. Knowing this can help you figure out how to improve your score.
Here are nine common explanations for a lower credit score:
- Serious delinquency: You have one or more accounts with late payments.
- Serious delinquency and public record of collection filed: You have one or more accounts that have gone to a collection agency.
- Time since delinquency is too recent or unknown: You have one or more accounts that are recently past due.
- Level of delinquency on accounts: Your accounts are 60 to 90 days or more past due.
- Number of accounts with delinquency: You have numerous past due accounts.
- Amount owed on accounts: Your amount of debt is too high.
- Proportion of balances to credit limits on revolving accounts is too high: The balances on your credit cards are too high.
- Length of time accounts have been established: The length of your credit history is not long enough to show responsible credit management.
- Too many accounts with balances: The amount of accounts you have with balances creates concern over how much debt you’re carrying.
How Quicken Loans Interprets Your Credit Score
At Quicken Loans, we match you with the best possible mortgage to fit your needs based, in part, on your credit score. Our mortgage bankers take the time to evaluate your financial situation and offer expert advice. If you’re credit is less than perfect, FHA Loan programs like FHA Express allow lower credit and income requirements, but still offer the security of a fixed rate loan. Not to mention the added security of a program that was created by the Federal Housing Admisistration.