Your Credit Score: What It Is, How It’s Calculated, and How to Raise It

It’s a non-nonsense fact of life. If you want to buy your dream home, get the most beneficial mortgage loan, and get the best interest rates, you need a good credit score. But to a lot of folks, the notion of “credit score” is about as clear as Maine clam chowder. So let’s take a moment to look at what your credit score is, how it’s calculated, and specific things you can do to enjoy the attractive benefits of a good score.

Defining “Credit Score”

Your credit score is a three-digit number—typically ranging from 300 to 850—that indicates to lenders how likely you are to repay loans in a timely manner. The higher your credit score, the more likely you are to be approved for loans—and at better interest rates. The credit score model used by KFS Mortgage Company LLC and most other financial companies was created by the Fair Isaac Corp. and is now known simply as FICO. In the U.S. there are three major credit bureaus—Equifax, Experian, and TransUnion—and they dominate the market for collecting, analyzing, and disbursing consumer credit information.

A credit score of 700 or higher is viewed positively by lenders and can result in your benefiting from a lower interest rate. Credit scores are generally categorized as follows:

  • Excellent:  800–850
  • Very Good:  740–799
  • Good:  670–739
  • Fair:  580–669
  • Poor:  300–579

How Your Credit Score is Calculated

Your credit score is based on 5 key factors. Below we list specifically what they are and how much each (as a percentage) contributes to your overall score:

  • Payment History … whether you’ve paid your bills on time, how many late payments you’ve had, if any, and how late they were. 35 percent

  • ·Amounts Owed … the percentage of credit you’ve used compared to the credit available to you, which is known as credit utilization. 30 percent

  • Length of Credit History … how long you’ve been using credit. Longer credit histories are considered less risky because the lenders have more data to determine your payment history. 15 percent

  • Types of Credit (Credit Mix) … such as mortgages, car loans, and credit cards. A greater variety shows lenders you can manage various types. 10 percent

  • New Credit … too many recent applications can be viewed as a sign that you’re desperate for credit. 10 percent

How to Raise Your Credit Score

So, what do you do if your credit score needs a good, healthy boost? As we detailed in our blog “Tips to Increase Your Credit Score,” the 5 critical steps you should take are:

  • Make Your Current and Future Payments Promptly
  • Pay Down Your Credit Card Debt
  • Refrain from Adding New Debt
  • Limit How Much Your Credit is Checked (By Not Applying for New Credit)
  • Be Patient Because Good Habits Will Pay Off!

For more information and answers to all your mortgage-related questions, please contact KFS Mortgage Company.