How to understand your credit score: 5 categories

A credit score is based on five main factors: payment history, credit utilization, length of credit history, credit mix and recent inquiries. The three major credit reporting agencies, Experian, TransUnion and Equifax, provide the credit data used by scoring models to generate your score.

Your credit score is a three-digit number, ranging from 300 to 850, used to assess how likely you are to repay your debts. This number is also called a FICO score.

Currently, the average credit score in the U.S. falls between 701 and 715, which is considered “good.” A favorable score can open the door to lower interest rates and larger sums of credit. The higher your score, the lower the risk that you won’t pay back your debts, increasing the likelihood that you’ll be approved for a loan.

Five factors influence how your credit score is calculated. Here’s a closer look at a FICO credit score breakdown:

Payment history (35 percent)

Credit scores primarily gauge your ability to make payments on time—whether for a mortgage, car loan, credit card or other types of credit. Timely payments have the biggest influence on your credit score. Your score reflects how often you’ve paid late, the number of days late and whether late payments were a recurring issue. Paying bills consistently is the most effective way to improve your credit.

Credit utilization (outstanding debt) (30 percent)

Credit utilization is the ratio of your outstanding balance to your total credit limit. Basically, it measures how much of your credit you’re using compared to what’s available. It’s recommended to keep your credit balance below 50 percent of your limit, with 30 percent being ideal. Maintaining a lower credit utilization is more beneficial to your score than not using credit at all.

Length of credit history (15 percent)

The longer your credit history, the better. A lengthy credit history demonstrates reliability, which can help increase your credit score. Keep in mind that opening new credit accounts can temporarily lower your score during the first six to 12 months. This is why your loan officer might advise against opening new accounts while applying for a mortgage.

Credit mix (10 percent)

A diverse mix of credit accounts suggests you can manage your finances well. A good mix might include a few credit cards, a retail card, an auto loan and a mortgage. However, opening too many credit cards isn’t recommended. Since credit mix only accounts for 10 percent of your score, focusing on paying off overdue bills will likely have a bigger impact on improving your credit.

New credit (10 percent)

Opening several new accounts in a short period can trigger multiple credit inquiries, which may negatively affect your score for up to one year. For those asking, “Why did my credit score drop?” a hard inquiry could be to blame. A hard inquiry occurs when applying for new credit, and a soft inquiry occurs when a company you’ve already borrowed from checks your credit.

When you’re applying for a mortgage, multiple hard inquiries within 45 days are typically treated as a single inquiry, minimizing the impact on your score.

What credit score do you need to get a mortgage? Different loan programs have different requirements. A score as low as 540 may potentially qualify you for an FHA or VA loan. You might also qualify using non-traditional credit sources, like rent or utility payments, when you do not have credit at all.

While change may not happen right away, it’s always worthwhile to work on improving poor or fair credit. Depending on the score, positive effects may be seen within several months.

Guild also offers programs like MyPath2Own, designed to help first-time homebuyers who can’t qualify for a mortgage today due to credit, income and debt, to take steps to get mortgage-ready and receive financial assistance for homeownership when they do qualify.*

We’re here to lend a hand. Contact your local Guild loan officer to find out how much house you can afford based on your current score and see where there’s room for improvement.