Understanding FICO scores: 6 things that go into the all-important figure

How to make sense of your credit score

Key takeaways:

  • Generally, the better your score, the better the terms you’ll get on your mortgage
  • Credit scores are based on a number of factors including outstanding debt, your repayment history and available lines of credit
  • If your credit score isn’t where it needs to be for the mortgage you want, take time to improve it before buying a home—even small changes can add up over time!
  • Check out Experian to check your credit score for free as well as sign up for educational tips, error correction tools and live customer support

When applying for a mortgage, your credit score is what largely determines how much a bank or lender will lend you, as well as what the interest rate on your mortgage will be. Your credit score is a measurement of your financial responsibility and how likely you are to make payments on time.

What goes into my credit score?

Your credit score is determined by many different factors that are then given a numerical value. These factors are:

1) Payment history

This section shows if you have paid your bills on time and if you’ve missed any payments in the past.

2) Credit utilization

This section shows the balance owed on your credit cards and compares it to your credit card limits. It’s smart to keep your credit utilization under 30%.

3) Age of open accounts

The age of your open accounts and credit history are also included in your score. This section shows the average age of your open credit accounts. The longer your accounts have been open, the better.

4) Number of credit lines

The variety of credit types and the number of credit lines you already have will improve your credit score. However, you should still maintain a low credit utilization rate on all these accounts.

5) New credit inquiries

Your credit score is also determined in part by the amount of credit you have applied for recently. Lenders favor a low number of recent credit inquiries. Getting pre-approved for a mortgage can hurt your score if you have too many "hard pulls" on your credit in a short period of time.

6) Negative marks

Negative marks on your credit history such as bankruptcies, accounts in collection and tax liens can all dramatically lower your credit score. If you have negative marks, take steps to correct them if possible.

What is my credit score?

Has learning about credit scores made you curious about yours? Experian (one of the 3 main credit reporting bureaus) is a great resource you can use to not only find out your score for free, but also sign up for educational tips, error correction tools and live customer support.

What is a good credit score?

Your credit score will vary depending on the agency that produces it. The three major credit reporting agencies are Equifax, Experian and TransUnion. The definition of a good credit score will also vary depending on which company produces your credit score.

The general credit brackets are:

Credit Score Rating
800+ Perfect
750-799 Excellent
700-750 Good
650-699 Average
600-650 Below Average
550-599 Poor
500-549 Very Poor

Banks reserve good mortgage and interest rates for people with credit scores of 720 and higher. The best rates are given to people with scores of 760 and above. Make sure to check your credit scores online before applying for a mortgage, as this will give you an opportunity to clear up any issues or discrepancies that may appear ahead of time.

What if I don't have a great score?

If your score isn't ideal, there are still ways you can get a loan. However, you'll likely have to come up with a larger down payment and pay higher fees. You could also take time to improve your score before buying a home. Even three months of healthy credit habits could improve your score and save you money on your monthly mortgage payments. Learn about how you can repair your credit.

Once your credit score is in good shape, you’re almost ready to get pre-approved for a mortgage. Find out what else you need to get pre-approved.

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Photo credit: Tim Green