What Is Your Credit Score?

Your mortgage depends a lot on your credit score called your "FICO Score." What is this mysterious number? What hat does it get pulled out of?

FICO

To start with some trivia, your credit score is called a FICO score because it's named after the company that collects all the data about your credit, the Fair Isaac Corporation.

What the score means

Your FICO score simply indicates how much of a risk you are to people lending you money. A high score means that you will most likely pay any money someone lends you. A low score means that there's a higher chance you won't pay the money you borrowed. "What?," you might say, "I pay my bills on time and still have a low credit score!" Well, paying your bills is one part of figuring out if you can pay a loan.

The parts of a FICO Score

That's why your FICO score is divided into five different numbers, only one of which is about you're paying your bills on time.

Payment history

35% of your score is whether or not you pay your bills on time. It's a big part of the picture, but as you can see counts for less than half of your total score.

Debt versus available credit

30% of your score is determined by how much you've borrowed based on how much credit is available to you. So if you've run your credit cards up to the max, you'll have a lower score here. Why? It means that you are less likely to pay your debts because you have so many of them.

Length of credit history

15% of the total score is determined by how long you've been borrowing money and paying it back. Obviously, if you haven't been borrowing money for a long time, a lender can't tell how well you pay your debts.

Credit sought

10% of your total score is determined by how much money you've been looking to borrow. If you don't have many debts and pay your bills on time, but you're looking to buy a house, a car, a washing machine, and get five new credit cards, you're a bigger risk.

Credit type

10% of your score is the type of credit you use. Some credit is better than others. If you're borrowing money with low interest rates, that's good credit because you're going to owe less. If you've got high interest credit cards, that's bad credit because you're going to owe more on money and it's hard to pay down high interest loans. With some loans, you're paying lots of principal each month. That's good credit because you're paying down the loan. Some loans, such as department store credit cards, let you pay mainly the interest every month. That's bad credit because you're not really paying down the loan.

Your loan cost

Your FICO score helps determine how expensive your loan will be. When you get a loan, you pay interest and points on the balance of the loan. Interest is a recurring charge on the money you've borrowed and points are an up-front fee. When both are combined into a single, annual expense, you get the APR. The lower your credit score, the higher the APR, or annual cost of the loan, which you pay for by paying higher interest rates, higher points, or both.

There's more

While that seems cut-and-dry, your mortgage costs are affected by other factors as well, such as the size of the loan, whether you're self-employed or not, how long you've been in your job, and other factors. So it helps to go over your total financial situation — including your credit score — with a loan counselor to help put you in the best loan.