How Are Credit Scores Calculated
Ever wonder how your credit score is factored? You’ll soon know this, and why your score is important for VA loan qualifying. First off, your credit score is a number that can open doors for you, save or cost you money, help you buy or rent a car, and help you qualify for that house you’ve been dreaming about.
But, before we dive into how scores are calculated, let’s understand why VA-approved lenders, including Veterans First Mortgage, need a qualifying credit score before approving you for a loan.
Simply put, credit scores are one of the best metrics for determining a borrower’s creditworthiness. Your credit score can help a lender understand your financial habits. Do you repay loans? Do you pay on time? Are you responsible with credit? Do you know how to manage credit? Your credit score may give lenders the answers to these questions and more.
The VA allows lenders to set their own credit requirements for VA loan qualification, which is why minimum credit scores may vary from lender to lender. At Veterans First, the minimum credit score is typically in the mid-600s.
At Veterans First, a qualifying credit score gets you one step closer to a VA loan. Ultimately, you’ll need to meet all VA and lender qualifying requirements.
So, let’s dive into what makes up your credit score and how your habits ultimately affect it.
What Is a Credit Report?
A credit report is one of the first impressions you’ll make with your lender. It reveals your credit habits, including your bill payment history, loans in your name, current debt, and other important information. It is also what credit bureaus use to calculate your credit score.
What Is a Credit Score and Why Does It Matter?
Unlike age, your current credit score is not just a number. It’s a representation of your lending risk at this point in time. Scores typically range from 300 to 850 — the higher the better.
There are three major credit bureaus: Experian, Equifax, and TransUnion. While they all gather and archive information for your credit report, they use different scoring methods. That’s why your credit score may vary.
Your credit score can also determine what interest rate you might get on your VA home loan. So, it’s a good idea to develop sound credit habits from the get-go.
Why Does My Credit Score Change?
Many factors may cause your credit score to fluctuate.
Factors that can affect your credit score may include:
- Payment history, including the amount of on-time payments
- Credit accounts, including how many and what type
- Any accounts in collections
- Outstanding total debt
- History of credit usage and how long you’ve had each account
Which Factors Hold the Most Weight?
Each of the “big three” credit reporting agencies assigns a specific weight to the above factors. Typically, your history of on-time payments counts significantly, as does how much debt you have in relation to your credit limits. If all of your credit cards are maxed out, or if you have a history of making late payments, your score may be lower.
Additionally, how long you have been using credit matters. This can go either way in calculating your score. Do you have a long history of bad credit, or a short history of good credit? How many new credit card accounts have you opened in the last six months? All of these factors, combined with your spending behavior, may affect your score.
If you’ve been denied for a VA loan, due to some credit issue(s), there are some steps you can take now to start improving your score for approval in the future. Or, if you’d like more information about securing a VA loan despite an ideal credit history, contact our experienced loan team.
