How is a Credit Score Calculated?

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  • Everyone is curious about how this magical credit score number is created. We want you to learn the truth and be able to improve your credit score for buying a house.

    What Creates This Mysterious Score?

    What you call your credit score is technically called your “FICO score.”  It was created as a way to measure how much of a credit risk you are by a company called Fair Isaac (now called FICO).   Scores range from 300 to 850.  Mortgages generally require at least a 620 (FHA says 640 now) credit score for buying a home.  Be sure to see our Credit Improvement Tips.

    Kind of like Coca-Cola, the formula used to generate your score is a secret, but here are several things that we do know:

    35% of your score is based on your Payment History.  Making debt payments on time is the single best thing you can do.

    30% of your score is from your Outstanding Balances. Keeping your credit account balances under 50% or, even better, less than 30%, of the available credit on that account.  For example, keep less than $3000 on a credit card with a $10,000 limit.

    15% of your score is caused by your Length of Credit History. Keep accounts you’ve had for a long time, even if they have a zero balance.

    10% of your score comes from the Types of Credit You Use. A variety of credit types (car loan, credit card, store account, etc.) is good for your score.

    10% of your score depends on Recent Credit Inquiries. Getting your credit score “pulled” very often drops your score.  You definitely want to limit inquiries to the bare minimum.

    Buying a new car will make it much much harder to qualify for a home. Buy the house first, then the car!

    24% of credit reports contain errors serious enough to deny you a loan. Check your credit report yearly and correct errors.

    Thinking of buying a home in the Portland, Oregon area? Checkout our First Time Home Buying Classes!

    How is a Credit Score Calculated? was last modified: May 1st, 2018 by David Axness

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