How Is My Credit Score Calculated?
Credit reporting agencies like Equifax and Experian collect and store information about your credit history to create credit reports and scores. These scores are essential tools used by lenders—such as banks and loan companies—to assess your creditworthiness.
Credit scores typically range from 300 to 850, according to FICO standards. FICO uses five key factors to evaluate your creditworthiness:
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Payment History – 35%
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Amounts Owed – 30%
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Length of Credit History – 15%
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New Credit – 10%
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Credit Mix – 10%
1. Payment History (35%)
Making payments on time shows financial responsibility and has a positive effect on your credit score. On the other hand, late or missed payments can significantly damage your score.
If payments go unpaid for too long, they may be sent to collections or charged off—meaning the creditor stops trying to collect the debt. This can lead to even greater drops in your credit score.
2. Amounts Owed (30%)
A high utilization rate (using a large percentage of your available credit) signals higher risk to lenders. Keeping your usage low helps maintain or boost your credit score.
FICO evaluates several factors under “amounts owed”:
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Total balances across all your accounts
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Types of debt (e.g., credit cards vs. auto or student loans)
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Number of accounts with balances
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Credit utilization ratio on revolving credit
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Loan balance vs. original loan amount for installment loans
Interestingly, responsibly using credit (rather than using none at all) can have a more positive impact on your score.
3. Length of Credit History (15%)
FICO considers both:
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The age of your oldest account
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The average age of all your accounts
Longer credit histories generally improve your score, as they demonstrate a consistent and responsible credit behavior over time.
4. New Credit (10%)
FICO evaluates:
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How recently you opened accounts
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The number and type of recent inquiries
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The proportion of new accounts relative to your total credit profile
Opening too many new accounts in a short time can hurt your score.
5. Credit Mix (10%)
Having a variety of credit types—such as credit cards, student loans, auto loans, or mortgages—can benefit your score. A diverse credit profile suggests you can manage different types of debt responsibly.
How to Check Your Credit Score
Reviewing your credit report is one of the best ways to understand your credit health.You can also obtain a free report from FICO or credit bureaus like Equifax, Experian, or TransUnion.
Why Credit Matters in Real Estate
Understanding what affects your credit score is crucial when preparing to buy a home. A strong credit score not only helps you qualify for a mortgage but also influences the interest rate and fees you’ll pay.
Mortgage Approval and Interest Rates
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FHA Loans: Minimum score of 580
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Conventional/Conforming Loans (Fannie Mae & Freddie Mac): Minimum score of 620
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Jumbo Loans: Typically require a score between 700 and 720
“There are options for lower credit scores,” Huettner notes, “but those loans usually come with higher fees and interest rates.”
Down Payment and Mortgage Insurance
Your credit score doesn’t directly determine your required down payment. However, if your down payment is less than 20%, you’ll likely need private mortgage insurance (PMI).
“There should be a set of rules for evaluating applicants based on their credit scores and financial history,” says Huettner, adding that lower scores may lead to higher monthly PMI costs.
Take Control of Your Financial Future
To maintain or improve your credit score:
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Pay your bills on time
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Monitor your credit regularly
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Avoid opening too many new accounts unnecessarily
By following these habits, you can position yourself for a better mortgage rate—potentially saving thousands of dollars over the term of your loan.
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