How Is My FICO Score Determined?

Since a lower credit score means a borrower has had some late payments or other dings on their credit report, a lender may see this consumer as more likely to default on their home loan. All that said, a low credit score doesn’t necessarily mean you can’t score a loan, but it may be tough. They may still give you a mortgage, but it may be a subprime loan with a higher interest rate, says Bill Hardekopf, a credit expert at LowCards.com.

How a score is calculated

Credit scores are calculated by three major U.S. credit bureaus: Experian, Equifax, and TransUnion. All three credit-reporting agency scores should be roughly similar, although each pulls from slightly different sources. For instance, Experian looks at rent payments. TransUnion checks out your employment history. These reports are extremely detailed—for instance, if you paid a car loan bill late five years ago, an Experian report can pinpoint the exact month that happened. By and large, here are the main variables that the credit bureaus use to determine a consumer credit score, and to what degree:

• Payment history (35%): This is whether you’ve made debt payments on time. If you’ve never missed a payment, a 30-day delinquency can cause as much as a 90- to 110-point drop in your score.
• Debt-to-credit utilization (30%): This is how much debt a consumer has accumulated on their credit card accounts, divided by the credit limit on the sum of those accounts. Ratios above 30% work against you. So if you have a total credit limit of $5,000, you will want to be in debt no more than $1,500 when you apply for a home loan.
• Length of credit history (15%): It’s beneficial for a consumer to have a track record of being a responsible credit user. A longer payment history boosts your score. Those without a long-enough credit history to build a good score can consider alternate credit-scoring methods like the VantageScore. VantageScore can reportedly establish a credit score in as little as one month; whereas FICO requires about six months of credit history instead.
• Credit mix (10%): Your credit score ticks up if you have a rich combination of different types of credit card accounts, such as credit cards, retail store credit cards, installment loans, and a previous or current home loan.
• New credit accounts (10%): Research shows that opening several new credit card accounts within a short period of time represents greater risk to the lender, according to myFICO, so avoid applying for new credit cards if you’re about to buy a home. Also, each time you open a new credit line, the average length of your credit history decreases (further hurting your credit score).

How to check your credit score

So now that you know exactly what’s considered a good credit rating, how can you find out your own credit score? You can get a free credit score online at CreditKarma.com. You can also check with your credit card company, since some (like Discover and Capital One) offer a free credit score as well as credit reports so you can conduct your own credit check.

Another way to check what’s on your credit report—including credit problems that are dragging down your credit score—is to get your free copy at AnnualCreditReport.com. Each credit-reporting agency (Experian, Equifax, and TransUnion) may also provide credit reports and scores, but these may often entail a fee. Plus, you should know that a credit report or score from any one of these bureaus may be detailed, but may not be considered as complete as those by FICO, since FICO compiles data from all three credit bureaus in one comprehensive credit report.

Even if you’re fairly sure you’ve never made a late payment, 1 in 4 Americans finds errors on their credit file. Errors are common because creditors make mistakes reporting customer slip-ups. For example, although you may have never missed a payment, someone with the same name as you did—and your bank recorded the error on your account by accident.

If you discover errors, you can remove them from your credit report by contacting Equifax, Experian, or TransUnion with proof that the information was incorrect. From there, they will remove these flaws from your report, which will later be reflected in your score by FICO. Or, even if your credit report does not contain errors, if it’s not as great as you’d hoped, you can raise your credit score. Just keep in mind, regardless of whatever credit-scoring model you use, you can’t improve a credit score overnight, which is why you should check your credit score annually—long before you get the itch to score a home.

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