12. Your Credit Score: A Financial Reputation

The purchase of a home is often the largest financial transaction an individual will make, and for most buyers, credit plays a central role in determining whether that transaction is possible, affordable, or delayed. Your credit score is more than a number; it is your financial reputation. A strong score generally signals reliability to lenders, while a weak or nonexistent score suggests risk and can significantly increase borrowing costs or eliminate options altogether.

However, not everyone is tracked. Millions of Americans are considered “credit invisible,” meaning they have no recorded credit history, while others have limited reporting. Still, if you have used credit in any meaningful way, you almost certainly have a credit score.

What Hurts Your Credit and How Long It Lasts

Negative credit events such as missed or late payments, collections, charge-offs, foreclosures, repossessions, judgments, and bankruptcies can remain on your credit report for years. Most derogatory marks stay on your report for seven years from the original delinquency date, while a Chapter 7 bankruptcy can remain for up to ten years.

These events can significantly lower your credit score and make it harder — or more expensive — to obtain a mortgage, auto loan, credit card, or even non-loan approvals such as rentals, utilities, insurance, employment, or professional licensing. In many cases, a low credit score can be a dream killer.

The FICO Score: The Industry Standard

The most widely used credit scoring model is the FICO score, developed by the Fair Isaac Corporation. Founded in 1956, Fair Isaac Corporation created a three-digit scoring system ranging from 300 to 850 that is now used by approximately 90 percent of U.S. lenders.

While many Americans have a general sense of their credit score, a significant number do not know what their score is, how it is calculated, or why it matters.

How Credit Scores Are Calculated

FICO scores are calculated using five primary factors: payment history (35 percent), amounts owed or credit utilization (30 percent), length of credit history (15 percent), credit mix (10 percent), and new credit activity (10 percent). Together, these elements help lenders evaluate how likely a borrower is to repay debt as agreed.

1. Payment History (35%) – Whether you pay your bills on time

2. Amounts Owed (30%) – Your credit utilization relative to available credit

3. Length of Credit History (15%) – How long you’ve used credit

4. Credit Mix (10%) – A blend of revolving and installment accounts

5. New Credit (10%) – Recent account openings and credit inquiries

Understanding Credit Score Ranges

Credit scores are commonly grouped into ranges, from poor to exceptional. Higher scores typically qualify borrowers for lower interest rates, better loan terms, and greater financial flexibility. Lower scores may result in higher costs, stricter requirements, or limited access to credit altogether.

Importantly, FICO scores do not consider income, employment history, race, gender, religion, or marital status.

Credit scores generally fall into the following categories:

• Exceptional (800–850): Best rates and terms

• Very Good (740–799): Competitive borrowing options

• Good (670–739): Acceptable but improvable

• Fair (580–669): Higher rates, fewer options

• Poor (300–579): High risk; approval may require a cosigner or deposit

Building or Rebuilding Credit Takes Time

Whether you are rebuilding credit after financial hardship or establishing credit for the first time, improvement is possible through consistent habits. Reviewing your credit reports for errors, making on-time payments, keeping credit card balances low, and strategically adding positive credit history through secured cards, credit-builder loans, or authorized user accounts can all make a meaningful difference.

For those starting from scratch, a credit score can typically be generated within three to six months, though building strong credit takes longer. The key is consistency, not quick fixes.

Final Thoughts

Credit is foundational to residential real estate and personal finance. Understanding how credit works empowers you to make informed decisions, avoid costly mistakes, and position yourself for long-term financial success.

Thank you for reading this week’s edition of Bar Essentials. To learn more about our firm and attorneys, or to listen to other episodes, please visit picklerlaw.com. Bar Essentials is available on all major podcast platforms