FICO scores aren’t the only number when it comes to credit scores. Let’s review some of the truths about credit scores, so you’ll be able to put yourself in the best position if you need a loan or want to refinance your home.
Different Lenders Create Different Scores
Companies that produce FICO scores, the most widely accepted one, permit lenders to customize the systems they use to create scores. For example, a lender may weigh key factors more heavily than others. In addition, the big three credit reporting bureaus: Experian, Equifax and TransUnion, also create credit scores based on their individual formulas. Besides FICO, the three credit bureaus have their own scoring called VantageScore to compete with FICO. VantageScore is the score you’ll get from free credit reporting sites.
Key Factors Used in Determining Your Credit Score
According to Mortgage lenders in Denver, Gershman Mortgage, your credit score is typically determined using five key factors. Again, other factors and the weight of all factors differs for each lender and credit bureau.
- Payment history: Prompt payment of your bills, especially your mortgage, makes up about a third of your credit score. Late payments, charge-offs and collections damage your score.
- Amounts Owed: The amount of debt you’re currently carrying impacts your score. While the total is significant in the score calculation, revolving credit like credit cards have the most impact on your credit score.
- Length of Credit History: Making up approximately 15% of your score, this factor tracks how long you’ve had credit. The formula looks at the opening dates of all your accounts. The longer you’ve had credit, the better the standing.
- Types of Credit: This counts for about 10% of your credit score and the more diverse the types of credit, the better this factor will perform. Having a combination of different types of accounts including credit cards, car loans and a mortgage helps this factor improve.
- New Credit Searches: About 10% of your score will be based on new credit searches. When you are applying for credit, a search is done and then shows on your credit report. When too many searches show in a short period of time, it hurts your credit score. By only opening a new credit line when you need it, you can keep this factor from impacting your overall credit score.
As a homeowner, you may want to pull cash from your home to pay for expenses or make home improvements. Keep in mind these credit factors, so you can get the best interest rates to keep your loan affordable – you may even be able to lower your existing mortgage interest rate!