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Essential Things to Know About Credit Scoring

By Bill Gassett | March 4, 2023

Do you plan on buying your first house? If so, understanding your credit scores are essential.

When you are applying for a loan, your credit score is all-important. FICO and VantageScore commonly use a range of 300 to 850, but what is a good credit score?

Understanding what a good credit score is when you are a potential first-time buyer is vital. Let's examine the key considerations to know about credit scoring.

What Credit Score is Good?

Generally, a score above 690 is considered good, though this depends on the scoring system used. With a score of 720 or more, your credit is excellent.

If your score is between 630 and 689, it is considered fair. But if your score is under 630, your credit is bad.

Even if you think you have good credit, mortgage lenders will set their standards for what they consider good enough to qualify for a loan.

Part of choosing a lender will be knowing their programs, and the minimum required credit scores.

Getting a mortgage will be much more straightforward when you have excellent scores.

What to know about credit scores

How Good is Your FICO Score?

You have a good FICO score if your credit score is between 670 and 739. This is considered very good when your number is between 740 and 799. Any scores above 800 are rated as exceptional.

Your score will only have a fair rating between 580 and 669. If your credit score is in this range, you have some work to do to get to the average of 716.

The Fair Isaac Corporation created the first credit scoring system. FICO takes consumer data from major credit bureaus and, using its formula, creates the consumer's credit score. This gives lenders an easy way to judge someone's credit risk quickly.

Do You Have a Good VantageScore?

VantageScore also takes data from Experian, Equifax, and TransUnion to create their credit scores. Under this system, a score between 661 and 718 is considered good or “prime” by VantageScore.

If your score is in the highest range of 780 to 850, it will be rated as “superprime.”

Credit scores from 601 to 660 are called “near prime,” and a score under 600 is “subprime.” The average VantageScore is just under 700.

What are the Benefits of a Good Credit Score?

With a better credit score, you will find getting a loan easier and paying less interest. Other benefits can include the following:

  • A lower interest rate on your mortgage
  • You will pay less when your loan requires private mortgage insurance.
  • Unsecured credit cards and balance transfers with preferential interest rates
  • You will find it easier to get credit when you need it in an emergency
  • You could find it easier to rent a home
  • You might even pay less for car insurance when you have a high credit score

One of the steps in the process of getting a mortgage is improving your credit scores.

How to Improve Your Credit Score

Knowing how to improve your credit score before making significant purchases, such as a home, is crucial.

Payment History

The greatest influence on your credit score is your payment history. If you pay your bills on time, it will build your credit score.

But if you miss a payment or pay later than you should, your credit score will take a big hit that could stay on your credit report for 7 years.

Credit Utilization

The amount of credit you use can also greatly affect your score. If you hit the limit on your credit cards each month, it could badly affect your score. Try to keep your credit utilization under 30%.

If you have maxed out credit cards in the past, reducing credit balances and your utilization will gradually improve your credit. To help this situation, you can increase your credit limit or even become an authorized user on another credit card with a large limit but rarely used.

Credit Age

Don't close credit accounts. Even if you seldom use an account, it is often better to hold onto it unless you have a good reason to close it.

Not only does having more accounts increase your available credit, reducing your utilization, but the average age of your accounts also plays a factor in your credit score. While this plays a smaller role than payment history and utilization, it is still worth considering.

Credit Applications

When you apply for credit, the lender will create a hard inquiry on your account, slightly lowering your score.

While this effect is only temporary, multiple credit checks in a short space of time will add up. However, if you compare lenders and make multiple applications for the same type of loan over a short time, your credit score will not be penalized.

Check For Errors

There could be problems in your credit report that are negatively affecting your score. You can check your credit report once a year with each of the three main credit bureaus for free.

If you find any errors, contact the bureau concerned to dispute the information they have on you.

Final Thoughts on Credit Scores

There are many essential things to know about credit scores, especially when you want to be a homeowner. If you have questions about credit scoring, it is wise to ask your loan officer.

They should be well-versed in the requirements of their lending institution. Shopping around for a mortgage is always worth doing. You may find you can get better rates and terms from one lender to the next.

The rate you get on your mortgage will hold financial consequences. A lower rate means you pay less for your home in the long run. This is why achieving the best credit scores is a worthwhile goal.

Bill Gassett is an authority in the real estate industry with 38 years of experience. Bill is well respected for his informative articles for buyers, sellers, and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, the National Association of Realtors, Inman News, Newsbreak, Credit Sesame, Realty Biz News, and his own authoritative resource, Maximum Real Estate Exposure. He has been on of the top RE/MAX agents in New England over the last two decades.
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