Understanding Your Credit Score

An overview of your credit score and what influences it.

These days, your credit score is critical in many areas of your life: Getting a home or car loan, applying for credit cards, getting a good rate on your insurance, and even getting a new job are all affected by that three-digit number.

What is a Credit Score?

A credit score is a number between 300 and 850 that lenders use to determine whether to extend you credit, the amount of credit you qualify for, and even the terms (interest rate, loan amount, repayment schedule). Generally, scores over 700 are considered excellent while scores below 600 may need some work.

The score is determined by the three leading credit bureaus: TransUnion, Equifax and Experian. Your creditors — the companies, lenders, and organizations that lend you money and extend credit to you — report information to them such as your credit limit and whether you pay on time. Each agency keeps its own records so your score can vary from bureau to bureau. For a mortgage loan, generally the middle score is used.

“Why is my credit score for a mortgage different than the one I accessed at home?”

Creditors and lenders use more specific industry credit scores that are customized for the type of credit product you’re applying for. For example, auto lenders typically use a credit score that better predict the likelihood that you would default on an auto loan. Mortgage lenders use a score developed specifically for mortgage loans.

Why is it important?

Beyond securing a home mortgage loan and purchasing a home, credit scores are often used in determining prices for auto and homeowners insurance. Employers have also begun using the scores as part of background checks when making hiring decisions. The practice of using credit scores in nontraditional ways is expanding. It’s more important than ever to educate yourself about credit.

The following factors are used to determine your credit score:
  • Do you pay your bills on time? If you have late payments, had an account sent to a collection agency, or have declared bankruptcy, this will have a negative impact on your credit score.
  • What is your outstanding debt? The three leading credit bureaus, TransUnion, Equifax and Experian, look at how close you are to your credit limit (i.e., are you “maxing out” your credit cards). If the amount you owe is close to your limit, it is likely to have a negative impact.
  • How long is your credit history? In other words, how long have you had credit accounts open? A short history can have a negative impact, but it can be offset by on-time payments and low balances.
  • Have you applied for new credit recently? Applying for too many accounts within a short time period can negatively affect your score.
  • How many and what types of credit accounts do you have? The credit bureaus consider the number and type of accounts you have. A mix of installment loans — such as an auto loan — and credit cards may improve your score. Too many financial accounts or too many credit cards could possibly hurt your score.

Keeping your credit score healthy affects more than your mortgage these days. If you need to improve your credit score in order to reach your goals, your mortgage banker can refer you to local resources that provide credit counseling* or sit down with you to discuss your eligibility to apply for a home loan. Let’s get you ready to become a homeowner.

*Lake Area Mortgage; a Division of Royal Credit Union is not a credit counseling or financial advisement firm. This information is for educational purposes only and is not to be taken as guidelines or guarantees to improve your credit or financial situation.