What Makes Up a Credit Score?

Your credit score is the most important factor when determining whether you qualify for a loan. When you submit an application for a mortgage, car loan, or credit card the potential lender will check you scores with the three credit bureaus: TransUnion, Equifax, and Experian.

If you understand what makes up your credit score, you can use that information to make your score go up or down. Of course our goal would be to increase it as much as possible.

FICO's website explains what factors make up your total credit score:

Payment History - 35%
Amounts Owed - 30%
Length of Credit History - 15%
New Credit - 15%
Types of Credit Used - 10%

This information doesn't just tell us what the credit scores are made of. It can also tell us at least 5 ways to increase your credit score.

My next 5 posts will focus exactly on that. How to increase your score by affecting the factors that FICO uses to determine your score.

What's so important about a Credit Report??

Lots, I tell you.

Your credit report is a tool that lenders use to determine whether or not to approve your mortgage, car loan, credit card, store credit, etc..

It tells a potential creditor whether you have good or bad habits when it comes to paying your bills. This is broken down very simply into a score between 300 and 800 more or less. This way, the lender can quantify whether you are a good or bad credit risk. They can place guidelines on their approval process that include a minimum credit score required for approval.

The banks and lenders loose money by lending to people with bad bill-paying habits. Banks and lenders HATE loosing money. That is why credit reports exist.

Lenders are mostly looking at two aspects of your report:

• The Score
• Your Payment History

There are other aspects of the report and they are important because they affect your score. But these two are what lenders are grading while they make their decision whether or not to extend credit to you.

The Score

If your goal is to buy a home with no money down, you should be shooting for a minimum score of 600. (It used to be 580 but banks are getting tougher now because of high foreclosure rates)
You should be pushing for a higher score at all times. The higher your score goes, the lower interest rates you could qualify for. At high scores you also have access to more flexible mortgage programs that make the process go more smoothly for you.

Your Payment History

It may happen that you could have a great score but still don't get approved. That's because the lender doesn't underwrite a file blindly. They don't just look at the score. They want to know why your score is as high/low as it is.

If you have only just started using credit, you may have a high score because you have an account with good payment history and no bad accounts at all. Lenders look to see that you have about 3 accounts that you've kept in good standing for the last 12 months. They like to see at least one of those accounts have a high credit limit of one or two thousand dollars.

Now that we know how a potential lender uses your credit report, we can start to adjust things to make your credit look better in their eyes, resulting in that glorious loan approval!