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Understanding Credit Scores
Understanding credit scores
You already know that good credit is essential for receiving the best interest rates on what may very well be the largest loan your clients will request in their lifetime — a home loan. But do you know how credit scores are actually determined?
Credit scores depend on the scoring system used by each credit reporting agency, and different systems use different scales. But if your client has a good credit score from one of the three big credit agencies — Equifax®, Experian® or TransUnion® — they are likely to have a good score elsewhere.
Although credit reporting agencies keep their specific scoring calculations a closely-held secret, there are five factors that carry weight when it comes to assessing an individual’s credit:
- Length of credit history
- Types of credit
- Credit inquiries
- Payment history
- Total amount of debt
- While all of these factors are significant, the degrees to which they affect a credit score vary. For example, “types of credit” only makes up 10% of the total score, while payment history accounts for a whopping 35% — which is why it’s extremely important to make sure bills are paid on time. To find out more about the percentages for each contributing credit score factor, download this handy infographic from Better Money Habits®, “Your credit score: How it’s calculated.”
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