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How Is Credit Score Calculated?

Scott Steinberg4-Minute Read
May 06, 2022

How is your credit score calculated, how can you figure out your credit score, and what role does it play in the home mortgage, loan and real estate industry? As you might imagine, these are important questions, as credit scores are a critical determinant for securing any kind of loan. Of course, credit bureaus look at a few different values and variables when they seek to calculate your credit score, and the calculation process can sometimes seem like a mystery. Bearing this in mind, let’s take a closer look at the determining factors behind your credit score here. Then we’ll break down how you can improve your score if it’s not where you want it to be, and how it might impact your mortgage.

How Do Credit Bureaus Calculate Your Credit Score?

There are five major factors that leading credit bureaus such as Equifax™, Experian®, and TransUnion® consider when calculating your credit score (sometimes referred to as your FICO® Score). Each of these items is weighed differently when making these calculations.

Payment History

As the name indicates, payment history speaks to your track record of making timely and sufficient payments as agreed upon with your creditors. Because it speaks to one’s general financial health and overall trustworthiness in the eyes of lenders, your history of paying back loans has the largest impact on your credit score. For purposes of reference, it accounts for 35% (more than a third) of your score.

Credit Usage

Credit utilization refers to how much credit you’ve used compared to your overall monthly credit limits. For example, if you are currently maintaining a balance of $500 on your credit card, and your total credit limit is $1000, you’re utilizing 50% of the credit available to you. Lenders generally like to see a credit utilization ratio of under 30% of available credit utilized in any given month. As a determining factor, credit usage accounts for 30% of the credit score formula.

Length Of Credit History

The length of your credit history speaks to how long you’ve held access to credit, and how much of a time horizon that potential lenders can look back over when weighing your eligibility for funding. Length of credit history, which accounts for 15% of the credit scoring formula, is measured from the time that you first open up a credit card or receive a mortgage or personal, student, or car loan. Put simply: The longer that you’ve been a borrower and kept credit accounts open, the more sure your lender can be that you’re a dependable client. 

Credit Inquires

Accounting for 10% of the credit score formula, credit inquires occur when lenders run checks on your credit. It’s assumed that if myriad credit inquires happen, especially in short order, that you may be running the risk of financially overextending yourself and opening too many lines of credit. As a result, hard inquiries can knock down your credit score a little bit − although, in the case of those shopping for the best rate on home mortgages, all inquiries made within one 30-day period can typically be treated as one credit inquiry.

Credit Mix 

The last 10% of the credit scoring formula is determined by your overall credit mix. Put simply, having a mix of different types of credit accounts helps provide lenders with a better sense that you can handle different forms of credit. It helps to have a good range of credit types (credit cards, mortgages, student loans and personal loans) reflected on your track record.

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How Is Your Credit Score Calculated For A Mortgage?

As part of the loan application process, lenders will calculate your credit score as they go about examining your submission. Most lenders will look at the scores reported by each of the three major credit bureaus (Equifax™, Experian® and TransUnion®), as these scorings can vary slightly.

Although the exact scoring model used by lenders to calculate your credit score may vary, it’s worth noting that most are based on a variation of the FICO® Score. Whatever model your lender uses, it’s important to maintain a good credit history, have a better sense of how credit scores are calculated, and understand what’s considered a good credit score for each agency. Note that most lenders require a credit score of 620 to be approved for a mortgage.

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Why Is Knowing Your Credit Score Important?

Knowing your credit score is important because it is one major factor that lenders look at when evaluating your mortgage application. Likewise, understanding it helps get a sense of how lenders may perceive your overall attractiveness and dependability as a potential borrower, and what credit opportunities may be available to you. Keeping this in mind, it’s often a good idea to monitor your credit report for any suspicious or unfamiliar activity, and because doing so allows you to catch and resolve any errors.

How Do You Figure Out Your Credit Score?

There are several sites that you can visit, including those belonging to each of the major credit bureaus, to pull one or more credit reports that detail your credit history. Several popular options will even offer free access to credit scoring info on a periodic basis.

How Can You Improve Your Credit Score?

There are many ways to improve your credit score if desired. For instance, you might pay off outstanding debt, open new lines of credit, or make a point to consistently pay off bills in a timely fashion more often. Alternately, you might refinance debt to lower interest rates, report additional payments (like utility bills) to credit bureaus, or close unwanted or unutilized credit accounts. Mind you: There’s no quick fix here, but over time, you can certainly raise your credit score and improve your general standing in the eyes of lenders.

The Bottom Line

Knowing how your credit score is calculated can help you improve your overall finances and become a better and more well-informed borrower. In addition, it can also aid with future budgeting and expense planning, and help you improve your odds of qualifying for more lending opportunities − not to mention better interest rates and offers. Noting this, it’s critical to know your credit score before you start the mortgage application process. All it takes is one click to learn more about credit and its importance today.

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Scott Steinberg

Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. He’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD.