How Are Credit Scores Caluclated?


Ok Realtors, are you fully up to speed on how credit scores are calculated? It’s important to be conversational about credit when reviewing the topic of home financing with your clients.

Understanding the nuts and bolts of credit scoring isn’t just about adding another skill to your arsenal—it’s about deepening trust with your clients. As Realtors, speaking with some confidence on this topic help you demonstrate your industry competence, making you a more attractive agent to work with.

Understanding Credit Scores: What You Need to Know

Credit scores are determined based on five main factors, each carrying a different weight. Here’s a breakdown of what influences a credit score and how much each factor contributes:

1. Payment History (35%)
The most significant part of your credit score is your payment history. This factor considers whether you make your payments on time and in full. Consistency here reassures creditors that you are reliable and financially responsible.

2. Credit Utilization (30%)
This refers to how much of your available credit you actually use. Credit scoring models look favorably on those who use less than 30% of their total credit line. For instance, if your credit limit is $10,000, aim to maintain a balance of no more than $3,000 at any time.

3. Credit History Length (15%)
Longevity matters in the credit world. The length of your credit history tracks how long you’ve been using credit and the age of your oldest account. Older credit accounts contribute to a higher score, as they provide a longer track record of financial reliability.

4. Types of Credit in Use (10%)
Credit scores benefit from a mix of credit types. This includes both installment loans (like auto loans or mortgages) and revolving credit (like credit cards). A diverse credit portfolio suggests you can handle various types of lending responsibilities.

5. New Credit Inquiries (10%)
Every time you apply for new credit, a hard inquiry is made, which can slightly ding your credit score. However, it’s the least impactful factor. It’s also important to remind your clients that shopping for the best mortgage rates won’t hurt your score if multiple lenders request your credit report within a short period, typically 30 days.

Why This Matters to You

As realtors, you’re often the first point of contact for clients making one of the biggest financial decisions of their lives. By understanding these components, you can guide your clients through the complexities of credit scores, which can impact their loan conditions and interest rates. You don’t need to be an expert, but you should be knowledgeable enough to discuss the basics and direct clients to the right financial experts for their deeper queries.

Remember, the more you know, the better you can serve your clients and enhance your reputation as a knowledgeable and reliable realtor. So, take this information, use it to improve your client conversations, and when in doubt, partnering with a skilled lender can provide your clients with the detailed expertise needed for their specific situations.