How Credit Scores Are Calculated: Mortgage Approval
One of an Arizona home loan applicant’s first questions is “how does my credit look?” While they
often are aware of what their general credit score is, a borrower is typically not aware of how it got there.
Below is an outline of how credit scores are determined and the “rhyme & reason” behind the all important middle score.
5 Categories That Create a Credit Score:
1. Payment History: 35% of Your Credit Score
The payment history category takes into consideration how a borrower’s payment performance looks for each of the different accounts on their credit report. Derogatory information such as collection accounts and judgments also get lumped into the payment history credit scoring category. The most influential aspect of this category is typically based on the details of the late payments that appear on their credit report (how late, how many times was the borrower late, how much was owed and how recent were the
late payments).
2. Amounts Owed: 30% of Your Credit Score
The amounts owed category evaluates a few different factors. The overall amount of debt (or money owed) a person has is one of the key ingredients in this category. The credit bureaus also break down and evaluate how much a borrower owes on individual accounts AND on different categories of debt (ex: total revolving debt, total installment debt etc…).
3. Length of Credit History: 15% of Your Credit Score
The length of credit history category is relatively straight forward and measures the length of time a borrower has had established credit, how long individual/specific types of accounts have been established and how much time has passed since different types of credit have been used (ex: how long has it been since a borrower utilized a credit card)
4. New Credit and Inquiries: 10% of Your Credit Score
This section measures how many new accounts a borrower has established and how long it has been since they opened a new account. It also evaluates the number of inquiries on a borrower’s credit. There are a number of details surrounding how inquiries impact credit however one important rule to keep in mind is that a high number of inquiries can hurt your score especially if there is not a relative number of new trade lines established after the inquiries.
5. Types of Credit: 10% of Your Credit Score
The different types of credit accounts (“trade lines”) a borrower has and the number of each of the different types of credit a borrower has are factored into this category. The credit bureaus do not like to see an unbalanced credit profile (ex: too many revolving/credit card accounts is a negative).
The HOUSE Team is very knowledgable when it comes to breaking down a credit report and we educate our clients on how to leverage and improve their credit in a way that can help them obtain an opens in a new windowArizona Mortgage Approval. Call or email us today so we can help you! Team Phone: 602.435.2149 Team Email: Team@JeremyHouse.comcreate new email.
By Jeremy House
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