Understanding Credit Report Scores
A credit score is a number that lenders use to determine the risk of lending money to a given borrower. Your credit score shows whether you have a history of financial stability and responsible credit management. It can range from 300 to 850 – the higher the score, the better. Three credit agencies – Experian, Equifax and TransUnion – compile credit scores (also known as FICO scores) based on the information in your credit file. Each agency will report a slightly different score, but they should all paint a similar picture of your credit history.
If your are thinking about buying a house keep in mind that the interest rate you’ll pay for the money you borrow will be determined, in large part, by this three-digit credit score that’s generated from the information in your credit report.
To see how credit scoring works, here are the factors most basic credit scoring formulas take into account:
- Payment history: A good record of on-time payments will help your credit.
- Outstanding debt: High balances in relation to your credit limits can lower your credit score. Aim for balances under 35%.
- Credit account history: An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
- Recent inquiries: When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation.
- Types of credit: A healthy credit profile has a balanced mix of credit accounts and loans.
It’s important for you to note that credit scores do not consider your income, savings or down payment amount.
Your credit score takes into account both positive and negative information in your credit report. For instance, late payments will lower your score. But establishing or reestablishing a good track record of making payments on-time will raise your score. Your credit score is not static. It changes with every single payment you make or fail to make.
Of course, the most important factor for a good credit score is paying your bills on time. It’s just that simple. Even if you owe a small amount of debt, it’s critical that you make your payments on time.
*Note: American Pacific Mortgage Corporation DBA Capstone Home Loans is not a credit repair company; this information is for information purposes only. We are not licensed credit repair specialists or counselors.