How Are Credit Scores Calculated?

The concept of credit scoring has been around in some form for quite some time. Yet during the latter part of the 1990�s did credit scoring really begin to affect mortgage loan approvals. For a time, credit scores were part of a request for a credit report and at first lenders would refer to the score but not make it a requirement. Instead, the individual underwriter still made the final determination of credit worthiness. Today, almost every loan program available has a minimum credit score requirement. How are these credit scores calculated?

The emergence of credit scoring was initiated by the FICO Company who created the original algorithm used to calculate a credit score for mortgage loans. The score is a three digit number that ranges from as low as 300 to 850, with 850 indicating absolutely flawless credit over the previous few years.  What affects this number? There are five categories.

The most important category is Payment History which accounts for 35% of the total score and is the most important of the five. Over time, as consumers pay their credit accounts on or before the due date, credit scores will rise. Yet should a payment be registered as more than 30 days past the due date scores will begin to fall. If a payment is made more than 60 days past, scores will fall further and so on.

Available Credit is the second most important category representing 30% of the total score. Available credit looks at current balances versus credit lines. For example, a credit card has a credit line of $10,000. Credit scores begin to fall when the balance is more than 50% of the credit line and will continue to fall as the balance grows toward the line of credit and fall even more should the loan balance temporarily go over the credit line.

How long someone has had credit accounts for 15% of the score, while the types of credit used and recent credit inquiries account for 10% each. Borrowers who concentrate on Payment History and keeping account balances low, scores will move higher, faster.

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