Credit score and credit history questions answered and explained

What is a credit rating and how does it affect my buying a home?

Your credit rating is determined by your credit score, also called the FICO score, which estimates you as a financial risk. FICO scores range from a low of 300 to the best credit score of 850. Lenders use this score in determining if they will offer you a mortgage and what interest rate that mortgage will be at. Lenders look at this number as a summary of how credit worthy a person is and if the person is able to handle the financial burden of a mortgage.

How are credit scores calculated?

The credit bureaus use a mathematic algorithm to calculate your credit score from the data on your credit report. The data on your credit report is analyzed using industry-approved financial experience assumptions and then entered into the calculation used by the credit bureau.

Why are credit scores referred to as FICO scores?

The software that includes those industry-approved financial experience assumptions was created by the Fair Isaac Corporation (FICO). It is an industry standard. Your credit score is calculated using the same calculation that is used for everyone else in the country. There is no need to shop around for someone to recalculate and provide you with a better score.

What information on your credit history is most important for calculating your credit score?

According to some experts your credit score is based on the following in these approximate percentages:

35% on your payment history;
30% on the amount you owe;
15% on the length of your credit history;
10% on the types of credit you have used; and,
10% on recent credit.

This is merely a guesstimate from one group of economists.

What do the items that are considered in making up a credit score really mean to the consumer?

Your payment history. This is the number of credit accounts that you have had and have paid on time. It also includes the negative information from public records, including any account that is about to go to a collection agency. Also part of your payment history is the total number of delinquent accounts you have now or in the past, how long those accounts were delinquent, the time it took to resolve the debt, and how many are still considered delinquent. Delinquent student loans not only are looked at very seriously, but they can prohibit you from other government-backed financing.
Amount you owe. The amount you owe is the balances you currently owe on open accounts. The amount of your revolving credit lines that you have used can be an indication of being overextended. The amount you owe also includes what you owe on any installment loans, the original balances, and the type of loans. It also includes the number of zero balance accounts.
Length of your credit history. This is the total time tracked by your credit report. For each individual loan or account it is the length of time from the date that the account was opened to the date of the last activity on the account. The longer your credit history remains good, the better the score. The length of time since past problems, when the problems were resolved, and how you have handled credit since the problems occurred also impact the length of your credit history.
Types of credit. This is the total number of accounts in each type—installment, revolving, mortgage, and home equity loans. Those with a mixture of loan types get more points.
Recent credit. This is the number of new accounts recently opened, dates they were opened, and if those new accounts have caused payment problems. It is considered negative to open up several new accounts just prior to applying for a mortgage.

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