How Your Credit Score Is Calculated

Credit scores play a crucial role in modern financial life. Whether you’re applying for a mortgage, a car loan, or even a credit card, lenders use your credit score to assess the risk of lending to you. It influences not only whether you’ll be approved, but also how much you can borrow and at what interest rate.

Understanding Credit Scores

Most lenders rely on FICO® scores, which range from 300 to 850, to determine a borrower’s creditworthiness. The higher your score, the more financially trustworthy you appear to potential lenders.
In reality, you have three FICO scores—one from each of the three major credit bureaus: Experian, TransUnion, and Equifax. Each bureau maintains its own data and calculates your score based on that unique information.

Why Credit Scores Matter

Your credit score can significantly impact your financial life. Whether you’re purchasing a vehicle, securing a mortgage through platforms like MaisonLink, or applying for a personal loan, a small fluctuation in your score can mean the difference between approval and denial—or between a low and high interest rate.
Even non-lending situations may be affected by your score. Landlords, employers, utility providers, cell phone companies, and insurance agencies often check credit to evaluate your financial reliability.

What Is a Good Credit Score?

Generally, a FICO score of 720 or higher is considered excellent. Borrowers with scores above this threshold are more likely to receive favorable loan terms and the lowest interest rates.
Conversely, individuals with limited or no credit history—often due to avoiding the use of credit—may find themselves at a disadvantage. A lower score can lead to challenges when renting an apartment, applying for a job, or even setting up basic utilities.

Five Key Factors That Affect Your FICO Score

Your FICO score is determined by five primary components. Each factor carries a different weight in the overall calculation:

1. Payment History – 35% of Your Score

This is the most significant factor. Lenders want to know if you pay your bills on time. Missed payments, charge-offs, collections, bankruptcies, foreclosures, and legal judgments can all negatively affect your score. To maintain a strong payment history:

• Always pay bills on or before the due date.
• Consider setting up automatic payments or reminders to avoid late fees and penalties.

2. Credit Utilization – 30% of Your Score

Credit utilization refers to the amount of your available credit you’re currently using. A lower utilization rate signals responsible credit use. As a general guideline:

• Keep your credit utilization below 30%.
• For example, if your credit card has a $1,000 limit, try to keep your balance under $300.
• This ratio applies across all your credit accounts—not just individual cards.

3. Length of Credit History – 15% of Your Score

A longer credit history can improve your score, especially if it reflects responsible usage over time. Lenders like to see:

• Long-standing credit accounts.
• A consistent track record of on-time payments.

4. New Credit – 10% of Your Score

Opening several new credit accounts in a short time can hurt your score. It may signal financial distress or increased risk to lenders. Be cautious with:

• Multiple loan or credit card applications in a short period.
• Unnecessary hard inquiries on your credit report.

5. Credit Mix – 10% of Your Score

A healthy mix of credit accounts—such as credit cards, retail accounts, installment loans, and mortgages—can benefit your score. This shows you can manage different types of debt responsibly.

3. Length of Credit History – 15% of Your Score

The length of your credit history is a significant component of your overall credit score. A longer credit record indicates that you’ve managed debt responsibly over time. Even a shorter credit history can contribute positively if it shows consistent on-time payments and no negative marks.

Tips to Maintain a Strong Credit History:

• Keep your oldest accounts open, particularly those in good standing.
• Use older credit cards periodically to avoid closure due to inactivity—adding a small, recurring charge (such as a utility bill) is a simple and effective strategy.
• Avoid closing older accounts, as this can reduce your average credit age and negatively affect your score. This is especially important when preparing for major financial decisions, such as buying a home through MaisonLink.

4. New Credit – 10% of Your Score

Applying for new credit can lead to a hard inquiry, or “hard pull,” on your credit report. This may cause a temporary dip in your score because it signals to lenders that you may be taking on new debt.

Best Practices Before Major Financial Applications:

• Avoid new credit applications in the months leading up to applying for a mortgage, car loan, or other major financing.
• Limit the number of hard inquiries by spacing out applications and only applying when truly necessary.

Maintaining a stable credit profile can help you secure better loan terms and lower interest rates.

5. Credit Mix – 10% of Your Score

Lenders prefer to see a well-managed mix of credit types. This shows your ability to handle various forms of debt responsibly.

Common Credit Types Include:

• Revolving credit: Credit cards, store charge accounts
• Installment loans: Auto loans, personal loans, student loans
• Mortgage loans

While credit mix is a smaller portion of your score, it can still make a difference.

Key Advice:

• Don’t open new accounts solely to diversify your credit mix.
• If you naturally use different types of credit, managing them responsibly can enhance your credit profile.

Improving Your Credit Score

If you’re planning a significant purchase—such as buying a home through MaisonLink—check your credit score at least six months in advance. This allows time to dispute errors and make improvements to your credit health.

How to Check Your Credit Score

• Banks and credit card providers often offer free credit score access via monthly statements or online dashboards.
• You can also purchase your FICO® score directly from FICO or from any of the three major credit bureaus.

Reviewing Your Credit Report

If your score appears lower than expected, review your credit report for accuracy. You’re entitled to one free credit report per year from each of the three major bureaus:

• Experian
• TransUnion
• Equifax

Access Your Report:

• Visit: AnnualCreditReport.com
• Or call: 1786-735-2806

To Correct Errors:

• File a dispute with the reporting bureau(s).
• Include copies of all supporting documents and any correspondence with creditors.

Conclusion:

Maintaining a strong credit score requires discipline, awareness, and proactive financial habits. By understanding the key factors that influence your score and taking steps to improve it, you’ll position yourself for financial success—whether you’re applying for a mortgage through MaisonLink or managing everyday expenses.