You know that credit scores are important, but you’re probably wondering how they’re calculated and what the big deal is. This critical number can be looked at for several reasons: when you get a job, rent an apartment, open a new account, or apply for a loan—including a home loan.
Understanding credit scores, credit utilization ratios, score calculations, payment history, length of credit history, and credit scoring models will provide you with the information you need to review and even improve your credit score. It will come in handy when you are ready to buy or refinance a home.
Credit Overview:
Credit scores, most commonly FICO scores (300 to 850), are calculated from your credit reports by weighting payment history (35%), amounts owed/credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
Lenders use these scores to assess risk and determine loan terms, with ratings ranging from poor to exceptional. You can improve your score by making on-time payments, keeping utilization below 30%, prioritizing high-utilization balances, and correcting reporting errors — while avoiding duplicate new accounts, moving balances, and closing old accounts. Even if your score isn’t in the “good” range, loan options may still be available, and APM provides resources and advisors to help you navigate financing.
How is my credit score calculated?
The most common credit score is called your FICO score, which Stands for Adel Ishaq Companya data company that tracks and measures credit risk. The score is calculated using information from your credit reports with each of the three main reporting agencies, and is then combined and weighted to produce your score, which in turn can affect how much a lender will lend you at what interest rate.
While the exact formula is unknown, we do know that FICO scores are calculated by looking at five distinct categories. The importance of each varies, as do the factors within each category.
Payment date (weight: 35%) Empty title
Have you paid previous credit accounts—including installment loans such as car loans, medical bills, and student loans—on time? How many accounts have late or missed payments?
Amounts Due (Weight: 30%) is an empty title
How much is owed on your credit accounts, and how many accounts do you have? How much of your total available credit — also known as credit utilization ratio — are you using?
Credit History Length (Weight: 15%) Empty title
The longevity of your credit history is important. How long have you been establishing your credit accounts? What is the average age of these accounts, and how long has it been since you last used some of these accounts?
Credit Mix Used (Weight: 10%) Empty title
What types of credit accounts do you have? How many different types of credit accounts do you use?
New Balance (Weight: 10%) Empty title
How many new accounts or recent inquiries do you have on your credit report? How long has it been since you opened new credit accounts or lines of credit?
Credit score ranges
Credit scores range from 300 to 850. These scores can be subjective, and all lenders are different, but in general, these credit scores translate to:
- 800 or higher: exceptional
- 740–799: very good
- 670–739: good
- 580-669: justice
- 579 or less: poor
Even if your credit score is not in the good or higher range, there are still plenty of loan programs that may be available to you.
Contact an APM Loan Advisor about which loan programs you qualify for, and what other options might work for your situation. Of course, you should also aim to improve your credit score, or at least make sure your behavior doesn’t hurt your credit score further.
Improve your credit score
Once you understand score calculations and credit scoring models, there are things you can do to improve your credit score:
- Make payments on time. Set reminders or make payments automatically to make sure your bills are paid on time.
- Create some balance in how you reduce your debt. While paying off installment loans (car loans, mortgage loans, etc.) will certainly improve your credit score, paying off or stopping your credit cards can result in a quick jump in your credit score.
- Use a credit utilization limit of 30%. This means you should aim to keep your current credit card balances and revolving debt balances at or below 30% of each card’s available credit limit. For faster results, pay your bills with the highest credit utilization first, rather than the cards with the highest debt.
- Check for errors and inaccuracies. get a A free copy of your credit report, Review it carefully, and contact the office if you find any errors.
Don’t hurt your credit score
If you want to improve your credit score, you first need to make sure you’re not engaging in behaviors that hurt it. These negative influences can be a problem when it comes time to buy a home. With that in mind, you want:
- Avoid opening too many new accounts in a short period of time. Let the accounts have some time to age; This way, you can create a consistent payment history.
- Avoid moving debts to multiple cards. Focus instead on reducing the amount by making payments on time.
- Keep your accounts open. Don’t close your credit accounts. A sudden decline in your credit spending power does not look good for offices. Keep your accounts active by using them to pay your bills, including car loans, installment loans, and other types of debt… without racking up any new trash debt in the process.
Additional resources
APM has you covered when it comes to understanding your credit and navigating the home loan process. Check the following for more information:
Now you’re ready to get to work while improving your credit score. Here’s the thing, though: You don’t have to wait until your credit score is exceptional to buy a home.
APM Trusted loan advisors We can work with you now to find a loan program that fits your needs, and we will continue to work with you as your score and situation changes.
