Credit Scores Explained

September 20, 2022

Let’s face it, most of us don’t have a couple hundred thousand dollars under our pillow to buy a home or even a new vehicle. We need banks to loan us large amounts of money for big-ticket items. How do banks determine who qualifies for a loan by calculating our credit score?

Your credit score is 100% up to you. How does it work?

First, we explain how the banks obtain your scores. Loan institutions use three credit bureau agencies: TransUnion, Equifax, and Experian, to get your score. They submit your social security number, and each company gives a score from 300-850. The higher the score, the better.

The three credit bureau agencies use FICO and Vantage Score to determine your score. Below are the five items FICO uses to determine your score:

  • 35% Payment History – Pay down/off loans that are currently outstanding
  • 30% Amounts Owed – Do not spend more than you make. Keep your loan-to-debt ratio below 30% (not including your mortgage debt) but all other debt owed like vehicle loans, credit cards, student loans, etc. Experts say to stay below 10% if you want to maintain a credit score in the high 700s
  • 15% Length of Credit History – Keep the line of credit/loan open, even if the balance is zero. Do not apply for a dozen credit cards just because you can. The credit limit, even though it’s zero, the balance goes against your credit score under income to debt (#2 above.) Furthermore, do not close a bunch of credit cards either because the score is also measured by history by 15%.
  • 10% Mix – Keep a mix of credit (a car loan, a credit card, and a mortgage.) Lenders like to see a borrower who can handle a combination of loans.
  • 10% New Credit – Restrict yourself from applying for credit of any kind unless you have planned this through. Every time a creditor submits your application for a loan, it reduces the current score. They say 5 points or more for every pull.

Keeping a healthy, high credit score takes discipline and constant work. If you have questions or need help obtaining a loan, contact the experts at EB Mortgage today!

EB Mortgage is a locally owned mortgage company with experts in new home purchase, refinancing, and commercial loans. Our wholesale rates can’t be beaten. We offer more products, more options, and more solutions. Our “3C” Process is simple: complete our pre-approval request, consider options based on your requirements, and choose the offer that suits your needs best. Call us or e-mail us today! 

Written by the digital marketing team at Creative Programs & Systems: https://www.cpsmi.com/