What is a Good Credit Score

Written by Posted On Wednesday, 16 September 2020 11:08
What Credit Score is Considered Good When Buying a Home What Credit Score is Considered Good When Buying a Home

What to Know About Credit Scores When Buying a House

Are you looking to enter the realm of homeownership? When you are looking for a mortgage, lenders pay a lot of attention to your credit score. One of the most vital things to do before buying a home for the first time is to get your finances in order. It is, therefore, essential to have a good credit score if you want to get that loan and benefit from lower interest rates. But what is a good credit score and how can you improve it?

Let's look at what score your lender may consider shows you are an acceptable risk, and what you can do when trying to increase credit score.

What to Know About Credit Scoring

The most popular credit score systems are those created by FICO and VantageScore. They range from 300 to 850 and good scores are normally considered those of 690 and above. An excellent score is upwards of 720, though specific lenders may have their own scale for what makes a good score when customers apply for a loan from them.

A bad credit score is one from 300 to 629, and 630 to 689 is considered fair. But with a score in either of these ranges, you may find it difficult to get the loan you want.

The most used and best-known scoring system - FICO - is operated by the company previously known as the Fair Isaac Corporation, but has been operating under its current name since 2009. Like their closest competitor, they use the 300 to 850 range of scores, though they are used by more banks and lenders to decide creditworthiness.

VantageScore was developed by the three largest credit bureaus - Equifax, TransUnion, and Experian - in 2006. While it previously used a different scale, they have now changed to the same scoring range as FICO.

The majority of people's scores will be 650 or higher. The average FICO score hit a high of 706 in 2019 up from 704 the previous year. While the averages have been increasing for many years, this is likely to change in 2020 thanks to the global pandemic. Averages for VantageScore are lower, hitting 682 in 2019.

There are mortgages with low credit score requirements but why go down that road? When buying a home it makes so much sense to work on your finances well in advance of your purchase. It can make such a difference in the rate and terms you will receive from the lender.

The Benefits of Having a Good Credit Score

The advantage of a good credit score can benefit you in many ways. If you have an excellent score, you will find it easier to get the loan you want and you should have less interest to pay as well. A lower interest rate will have a significant effect on the amount of money you have to pay over the course of a mortgage. Bad credit mortgages mean less than favorable terms that can really put a dent in your wallet.

Besides the beneficial effects on your chances of getting the mortgage you want, you could be offered unsecured credit cards or loans at low-interest rates. You may be able to find a balance transfer deal that saves you money on your monthly payments. Car loans will be easier to get and you will have fewer problems if you need a loan in an emergency.

Credit scores can sometimes be used by landlords as well, and in some states, a higher score will give you a lower car insurance premium.

Things You Can Do to Improve Credit Score

Whichever, scoring system your lender is using, they are very similar in the ways they assess your financial history. They take into consideration many factors, but not missing payments is the most crucial factor they use to create your score. Also very important, is how much credit you use, this is known as credit utilization.

Let's look at what you can do to improve your credit score so that you can benefit from lower interest rates and more. Besides the advice found here, you might also want to try using a company like Credit Karma. What Credit Karma does is really simple. They provide financial guidance that allows you to make better-informed credit decisions. Many folks have no idea how their financial choices will impact their credit score.

For example, do you know what will happen in you cancel a credit card? Will doing so help or hurt your score? Obviously doing things that are going to negatively impact your score would be foolish. This is where Credit Karma comes in to help.

Paying Bills on Time

It isn't enough just to pay your bills, you need to do it in a timely fashion. It is the largest and most critical factor affecting your credit score, so you need to make sure that it isn't something you neglect.

If you have a history of making late payments on bills, it could have long-lasting negative effects on your credit. Late payments can remain on your record for as long as 7 years. While you might have problems in your credit history, that you can't go back and fix, you can make sure future payments are made on time, which will increase credit score going forward.

Credit Utilization is Essential

Aim to make sure your credit card balance stays well under your credit limit. If you are always maxing out your credit limit, naturally, it isn't going to look very good and this is reflected in your credit score. Ideally, you should try to use 30 percent or less of your available credit limit. This is for all of your credit cards, and you could improve the situation by applying for a higher limit.

Another way to reduce your credit utilization is to have your name added to a credit card which is rarely used. If you can become an authorized user of a card that has low utilization, it will positively contribute to your overall credit usage.

Multiple Credit Accounts Can Be Helpful

The more credit accounts you have open, the better, and it has several benefits to your score. It will mean that the average age of your accounts is likely to be older and provide a better overall credit limit. The age of your credit accounts is a more minor factor that is considered within the score, but it all helps.

Don't close down old accounts you no longer need, unless the costs involved are prohibitive. While you could save some money on fees by closing accounts, it will increase your overall credit utilization. You could also apply to increase your credit limit on those accounts, though the next factor should also be remembered.

Keep Credit Applications Minimized

When a lender makes a credit check on your account for the purpose of approving a credit application, it leaves a mark in your credit history. You should avoid applying for a lot of credit over a short period, particularly just before a mortgage application. Many checks on your record over a short period will reduce your credit score.

When buying a house for the first time you should also stop making any large purchases. Doing so could actually cost you your ability to get a home loan.

Checking Your Credit

Take a look at your credit reports to make sure there isn't false information contained within them. If you do find something wrong, you can dispute the information with the credit bureau before you apply for credit. You can get a free credit report from each of the credit reporting agencies once a year. Why not take advantage of this?

Making sure there are no credit report errors is a wise move. Having an error could have a dramatic negative impact on the terms you receive from a lender.

Work With A Mortgage Broker

When you are finally ready to buy a home, it would be an excellent move to work with a mortgage broker. The benefit of working with a broker rather than a bank is that they will have far more options to custom tailor your financing. Mortgage brokers typically have access to far more lending programs than one lending institution. The broker can seak out the program that works best for you.

For example, maybe you want to get an FHA or VA loan? Could you have a strong desire to have something other than a thirty-year mortgage? A broker will seek out the perfect match for you.

Final Thoughts on What's a Good Credit Score

Working on your credit score is one of the most essential things you can do especially when you are buying a home. The mortgage interest you pay can really add up. Having an excellent credit score can save you thousands of dollars over the life of the loan. Hopefully, you have got something out of the information provided on good credit scores.

About the author: The above article about what is a good credit score was written by Bill Gassett. Bill is a nationally recognized Real Estate leader who has been helping people buy and sell property in the Metrowest Massachusetts area for the past thirty-four plus years. Bill has been one of the top RE/MAX Realtors in New England for the past decade-plus. His blog, Maximum Real Estate Exposure, is the most visited real estate agent website in the US.

His real estate advice has been featured on CNBC, RIS Media, National Association of Realtors, Today.com, Inman News, Placester, Credit Sesame, and others.

Bill covers real estate sales in the following Massachusetts communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

Reach out for Bill's advice anytime you need it.

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Bill Gassett

One of the top RE/MAX agents in New England over the last decade plus. Providing exceptional real estate services to buyers and sellers in the Metrowest Massachusetts area including the following communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

See my real estate website at Maximum Real Estate Exposure - one of the most visited real estate sites in Massachusetts.

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