Understanding Credit Scores

A breakdown of what you need to know to understand how your credit score impacts your homebuying process

Understanding your Beacon Scores; A Guide to Your Credit Health

Ever wondered how lenders decide if you’re creditworthy? Enter Beacon scores, the numbers assigned to you by Equifax and TransUnion, the credit collection companies. These scores are like snapshots of your financial habits and help financial institutions determine how reliable you are with credit. Let’s delve into the five categories that form the foundation of your Beacon score:

1. Payment History (Approximately 35%):

Your history of paying debts speaks volumes. This includes your track record on credit cards, credit lines, installment loans, auto loans, student loans, and more. Lenders also consider any public records or collection items such as bankruptcies, foreclosures, liens, and judgments. The timeliness, frequency, and amount of missed payments factor in here too.

2. Amounts Owed (Approximately 30%):

The sum you owe on various accounts is important. This category considers your balances on different types of accounts, number of accounts with balances, credit card usage, and installment loan amounts. If you’re keeping an eye on credit card limits and comparing them to balances, so are lenders. Rules of thumb is to keep balances on revolving debt at 50% of their limit.

3. Length of Credit History (Approximately 5-7%):

Time is on your side. The age of your oldest and newest accounts matters. Additionally, the duration of different account types and the time since account activity plays a role. Even the age of any public record items on your file is considered.

4. New Credit (Approximately 10-12%):

Frequent credit shopping raises eyebrows. New accounts and recent credit inquiries could affect your score. Requests for credit initiated by you are tracked, while inquiries for pre-approved offers or account reviews aren’t considered.

5. Type of Credit Used (Approximately 15%):

Diversity matters. Lenders want to see a mix of credit types, such as credit cards, installment loans, and mortgages, to gauge your credit management skills.

Keep in mind that most lenders look for two active sources of credit, each at least $2000, that have been paid on time for a year. The insured mortgage threshold is 600, but most lenders prefer scores of at least 650.