The Role of Your Credit Score
There are a few different industry methods of measuring your credit score, the most prominent being the FICO score. The FICO model was developed by the Fair Isaac Corporation and has been adopted by the majority of banks and lenders. There are several FICO measurements, but the generic and the mortgage scores range between 300 and 900, which aim to quantify a person’s creditworthiness. You are legally entitled to one free ‘soft’ credit report per year without affecting your credit score. Here is the breakdown:
Payment History (35%): A lender wants to know if you’ve paid off your credit accounts on time or had any negative information on record in the last 6 years of your credit history (including bankruptcy).
Amounts Owed (30%): This is essentially a person’s debt utilization, a mix of 6 different debt metrics. This includes; debt to limit ratio, number of accounts with balances, different types of credit accounts utilized, and the amount paid down on installment loans.
Length of Credit History (15%): Details how long your credit accounts have been established. Considers how long different types of your oldest and most recent credit accounts have been active.
New Credit (10%): Reflects how many accounts have recently been opened, which trigger ‘hard’ credit checks. If there’s been several recent credit requests, it will affect your credit score negatively because it indicates a more urgent need for funds.
Credit Mix (10%): Reflects the various types of credit being used, including revolving credit (i.e. credit cards), and installment loans (i.e. mortgages, auto loans, student loans, etc).