How Your Credit Score Is Determined

There are 5 sections that come into play when determining what your credit score will be.

1.     Payment History: Accounts for 35% of your credit score

Besides your actual score this will be the first thing lender’s look at in determining your worthiness of a home loan.

Credit card, car, or other late payments may not be a deal killer. However multiple mortgage late payments can prevent you from getting a new home loan.

If you want to qualify for the lowest interest rates you should not have more than one 30 day late payment in the last 24 months. Sub-prime lenders will sometimes allow for 90 day late payments.

It is difficult to say how many and at what frequency late payments from other debt will affect you from getting the lowest interest rates. Mainly because most loan approvals are done electronically.

Basically the more late payments or other adverse credit info you have on your credit report the lower your credit scores will be and expect higher interest rates.

Judgements, liens, charge off, and collections will all be taken into account as well.

2.     Amount Owed: Accounts for 30% of your credit score

It’s not necessarily how much credit you have access to. But how much of that credit you are using. Just because you owe money does not automatically make you a bad borrower either. What is being looked at is how much you owe.

Are your credit cards maxed out or close to being maxed out? Do you have multiple credit cards all with high balances? Did you just recently buy a new car? Are your student loans in forbearance?

Basically if the credit bureaus think you’re over extended they will penalize you with lower credit scores. Making it harder for you to qualify for new debt.

Lenders will look at the amount owed to determine you debt to income ratios. The more you owe on other debts the less you will be able to borrow.

3.  Length Of Credit History: Accounts for 15% of your credit score

In general the longer your credit history the stronger your score should be.  But people with recent or new credit may still score high depending on what the rest of the report looks like.

Many lenders like to see open accounts for at least 12 months. And generally like to see three open accounts or more. 

If you have never had credit and have no credit scores there are still many loan options for you.

4.    New Credit: Accounts for 10% of your credit score

Not only do they take into account how much new credit you are taking on but also how many times you have applied for new credit through inquiries. Every time someone pulls your credit it will have an adverse affect on your credit.

Most lenders do not care about new accounts or inquiries. However the more you have of either of those the more likely you score will drop and the higher interest rates you can expect.

5.   Types Of Credit: Accounts for 10% of your credit score

There is a complex formula that the credit bureaus use in coming up with this portion of your score. Including how many and what types of credit you have.

It is a good idea to have a good mix of credit if you can.

Most lenders do not care what types of credit you have.