Credit Scores
Credit Scores Explained by Coventry Enterprises of America
Credit Scores
Understanding Your Credit
Your credit score is a three-digit number that follows you into every major financial transaction of your life. It affects the interest rate you pay on your mortgage, whether you qualify for a car loan, and sometimes whether you can rent an apartment. Understanding how scores are calculated and what moves them is one of the most practical things any borrower can do.
Payment History (35 percent) is the single most important factor. Every on-time payment builds your score. Every late payment damages it. The severity depends on how late the payment was: 30 days, 60 days, or 90-plus days late all carry increasing penalties. Accounts sent to collections and bankruptcies have the most severe impact.
Amounts Owed (30 percent) measures your credit utilization, which is the percentage of your available revolving credit that you are using. If your total credit card limits add up to $10,000 and your balances total $3,000, your utilization is 30 percent. Keeping utilization below 30 percent generally helps your score. Below 10 percent is better.
Length of Credit History (15 percent) rewards borrowers who have maintained accounts for a long time. This is why financial advisors often suggest keeping old credit card accounts open even if you rarely use them. Closing old accounts shortens your average account age and can lower your score.
Credit Mix (10 percent) considers whether you have both revolving accounts (credit cards, lines of credit) and installment accounts (mortgages, auto loans, student loans). Having both types generally helps your score slightly.
New Credit (10 percent) accounts for recent applications. Each hard inquiry, which occurs when a lender pulls your credit for a loan application, temporarily lowers your score by a few points. Multiple inquiries within a short window for the same loan type (mortgage shopping, for example) are typically treated as a single inquiry.
The difference between a 640 credit score and a 760 credit score on a $300,000 mortgage can easily amount to 0.5 to 1.0 percentage points in interest rate. Over a 30-year term, that translates to tens of thousands of dollars in additional interest paid. This is not a small distinction. It is one of the clearest examples of why your credit score is worth managing carefully before applying for a mortgage.
You are entitled to a free credit report from each of the three major bureaus (Equifax, Experian, TransUnion) every 12 months through annualcreditreport.com. Review all three reports for errors. Common errors include accounts that do not belong to you, payments marked late that were actually on time, and closed accounts showing as open with balances. Dispute any errors directly with the reporting bureau.