What Is a Credit Score?

What Is a Credit Score?

A credit score is a numerical representation of your creditworthiness based on your credit history. The most widely used scoring model is the FICO Score, ranging from 300 to 850. Higher scores indicate lower credit risk and qualify you for better interest rates on loans and credit cards.

How FICO Scores Are Calculated

FICO Scores are calculated from five weighted categories: payment history (35%), amounts owed / credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%). Payment history and utilization together account for 65% of the score and are the most impactful factors to manage.

Credit Score Ranges for Mortgages

Scores of 760 or above typically qualify for the best available mortgage rates. Scores of 700 to 739 receive moderate rate increases. Scores of 620 to 659 are the minimum for most conventional loans. Scores below 620 may still qualify for FHA loans, which allow scores as low as 580 with 3.5% down.

Credit Score Example: 620 vs. 760 on a $300,000 Mortgage

At an illustrative 7.25% rate, a 620 score produces a $2,046.53/mo payment. At an illustrative 6.25% rate, a 760 score produces $1,847.15/mo. That's a $199/mo difference, and about $71,800 more total interest paid over 30 years at the lower score.

How to Improve Your Credit Score

The most effective actions: make all payments on time, reduce credit card balances below 30% of each card's limit (below 10% is optimal), avoid closing old credit accounts, and avoid applying for multiple new accounts in a short period. Most significant score improvements occur over 6 to 12 months of consistent positive behavior.

Common Credit Score Mistakes

Closing old credit cards to "clean up" your file. This reduces your total available credit, raising utilization, and can shorten your average account age -- both can lower your score.

Applying for new credit right before a mortgage application. Each hard inquiry and new account can ding your score. Avoid new credit applications for at least 6 months before applying for a mortgage.