What Is A Credit Score?

A top concern for first-time homebuyers is understanding their credit score. Questions include: What is a credit score, does it affect my chances of getting a loan, and how can I improve it? Let’s break it down.

What Is a Credit Score?

A credit score is a three-digit number, typically ranging from 300 to 850, that reflects your creditworthiness based on your credit history. The three major credit bureaus in the U.S. are Equifax, Experian, and TransUnion. Each may report slightly different information, so it’s a good idea to monitor all three.

What Makes Up a Credit Score?

Your credit score is calculated using five main factors:

• Payment History (35%) – Whether you’ve paid your bills on time.
• Amounts Owed (30%) – How much credit you’re using compared to your limits (also called credit utilization).
• Length of Credit History (15%) – How long your credit accounts have been active.
• Credit Mix (10%) – A variety of credit types, such as credit cards, auto loans, and mortgages.
• New Credit (10%) – Recent credit inquiries and newly opened accounts.

How Does it Affect Loan Approval?

Lenders use this number to help determine whether to approve you for a loan or credit card, and at what interest rate. Typically, the higher your credit score, the better chance you have of getting approved for a loan at a lower rate. While your score is an important factor in loan decisions, it’s not the only one. Other things like your income, employment history, and debt-to-income ratio also matter.

How to Improve Your Credit Score

Improving your score takes time and consistency. Here are some key tips:

• Pay on time, every time. Even one late payment can significantly hurt your score.
• Keep balances low. Try to use less than 30% of your credit limit on each card.
• Avoid closing old accounts. The longer your credit history, the better. If you need to close an account, choose the most recently opened one.
• Diversify your credit. Having a mix of different types of credit (not just credit cards) can boost your score.
• Limit new credit applications. Opening several new accounts or having many inquiries in a short time can hurt your score.

Understanding Credit Inquiries

There are two types of credit inquiries:

• Hard inquiries happen when a lender checks your credit for a lending decision, like a mortgage or auto loan. These can affect your score, especially if there are many in a short time.
• Soft inquiries, on the other hand, do not affect your credit score. These include checking your own credit, pre-approval offers, or employer background checks.

According to the Consumer Financial Protection Bureau (CFPB), soft inquiries are completely safe for your score. So, feel free to review your credit report as often as needed—it’s a smart habit. “Credit scoring models also take into account that consumers shop around for the best rate on a loan or credit, and they don’t penalize you for comparison shopping. — In general, credit inquiries within 14 to 45 days of each other for the same type of loan will be treated as no more than a single inquiry. For the most common credit scoring models student loan, auto loan and mortgage-related inquiries that occur 30 days prior to scoring have no effect at all on your credit score.”¹

How to Check Your Credit Report

You’re entitled to a free credit report once a year from each of the three major credit bureaus. Visit www.annualcreditreport.com to access yours. You can also view your credit score anytime for free in Online Banking or the Mobile Banking app. Regularly reviewing your report can help catch errors or signs of identity theft early.

¹What kind of credit inquiry has no effect on my credit score? | Consumer Financial Protection Bureau