Everyone knows that you need a good credit score to get a loan, but how do you calculate a credit score? This article will explain more.
A good credit score will not only help you increase your chances of getting approved for a mortgage, but it will also help you secure a lower rate. But how do you calculate your score?
Let’s look first at what a credit score is. A credit score is a number that lenders use to determine whether they should offer you credit, and what interest rate you qualify for. Whether it’s a credit union, a credit card company, or a mortgage company, these lenders examine your credit report to learn how you’ve managed your finances in the past.
They will all want to be sure that you will repay your loan on time. In other words, they want to know your creditworthiness: your credit score assists lenders to determine the level of risk involved in lending you money.
There is not one universal seven-factor formula that every scoring model uses in exactly the same way. Credit scoring models are proprietary, and different models can weigh the same information differently. Still, most scores are influenced by the same broad credit behaviors.
For mortgage borrowers, that distinction matters because FICO® Scores are used by 90% of top lenders, including mortgage lenders. myFICO groups FICO score data into five main categories:
Some borrower-friendly explanations also break these broad categories into smaller items, such as total debt load, account age, hard inquiries, and public records. Those can all matter, but they are better understood as parts of the broader scoring categories above rather than as a single standard seven-part formula used by every model.
Credit scores are a complicated subject. You might even find out that you have more than one type of credit score. Why? Let’s find out.
Credit scoring agencies use a proprietary algorithm to determine creditworthiness, but rely on the factors described above when making those calculations.
For example: The three major credit bureaus, Experian, Transunion and Equifax use the FICO algorithm, first introduced in 1989 and used by the majority of lenders. VantageScore, a newer model introduced in 2006, uses a different algorithm to create a more predictive and consistent rating system.
| FICO FACTORS | VANTAGESCORE FACTORS |
|---|---|
| Payment history: 35% | Recent credit amount: 30% |
| Outstanding debts: 30% | Payment history: 28% |
| Length of your credit history: 15% | Credit utilization: 23% |
| Types of credit you’ve used: 10% | Account balances size: 9% |
| Amount of new credit: 10% | Depth of the consumer’s credit: 9% |
| – | Amount of available credit: 1% |
You will also have a credit score with each of the credit reporting agencies: Equifax, Experian, and TransUnion. Your score with each of these agencies is most likely very similar, but there may be discrepancies. Some credit reporting agencies may not update their information as rapidly as others.
For example, if you have recently paid off a loan, it may appear in Equifax but not have been updated in Experian, thus giving you a lower credit score on Experian.
Each credit bureau has its own name for its credit scoring model, even though they all use the same FICO algorithm. Experian calls it “FICO or FICO II,” Equifax uses “Beacon,” and TransUnion’s model is named “Empirica”. To make thing even more complicated, there are specialized credit scores used by lenders for specific types of loans.
If you are applying for a car loan, for example, lenders look at your Auto Enhanced score which gives more weight to your auto loan payment history. So, if you paid your mortgage and credit card payments in full and on-time, but your car loan payment was always late, that will reflect negatively in your Auto Enhanced score.
Calculating your credit score does not have to be overwhelming. Doing a couple of simple tasks will get you on the way to your score.
First, you need to keep track of your credit report. Regularly checking your credit report with a program like CreditKarma.com does not reflect negatively on your overall score, and you can take action if you notice something out of place. Each credit bureau has their own online system used to clear up discrepancies, and they are required to respond within 30 days of a properly submitted dispute.
Start shopping for a mortgage lender well in advance of home buying. Discover which credit score your lender uses, and focus on that score. All mortgage lenders use Experian, Equifax and Transunion. Your mortgage lender can help you find the best way to calculate your score with each of these credit bureaus, and offer creative solutions to increase your over-all score before you apply for a pre-approval.
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
Credit scores are calculated with proprietary scoring models that evaluate the information in your credit report. While the exact formula varies by model, the main factors typically include payment history, amounts owed, length of credit history, new credit activity, and credit mix.
No. You can understand the behaviors that affect your score, but you cannot calculate the exact number by hand because scoring models are proprietary and different models can weigh the same information differently.
myFICO groups FICO score data into five main categories: payment history, amounts owed, length of credit history, new credit, and credit mix. Payment history is typically the most important category, followed by amounts owed.
Mortgage lenders generally use FICO scores. The content states that FICO scores are used by 90% of top lenders, including mortgage lenders, while VantageScore is a separate scoring model with a different algorithm.
A FICO score is a real credit score, but it is not the only one. You may have multiple scores because different scoring models, such as FICO and VantageScore, can produce different results from similar credit report information.
Your mortgage score can be different because lenders may use a different scoring model than the one shown by a consumer site. Mortgage lenders commonly use FICO-based scores, and your score can also vary by credit bureau depending on when each bureau updates your report.
Your scores can differ because each credit bureau may have slightly different information or may update your file at different times. For example, a recently paid off loan might appear with one bureau before it appears with another.
No. Regularly checking your own credit report or score through a service like CreditKarma.com does not negatively affect your overall score, according to the content.
Timing can vary because credit bureaus do not always update at the same pace. If you dispute an error through a bureau’s online system, the bureau is required to respond within 30 days of a properly submitted dispute.
It can. Opening several new accounts or creating too many hard inquiries in a short period can lower your score because new credit activity is one of the factors used in common scoring models.
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