BY BILL GASSETT Real Estate Agent with RE/MAX Executive Realty 91362
How and Why You Want Great Credit Scores
Are you looking to improve upon your credit score? If so, you are being very wise, as they affect so many aspects of our lives from a financial perspective. A good credit score is important when you are looking to buy or rent a home.
Lenders and landlords use credit scores to judge whether you will be an acceptable risk. But what is a good credit score?
Let's take a look at what is considered good and how you can achieve it. The quicker you improve your credit scores, the better off you will be done the road when it really matters.
What is a Good Credit Score?
Credit scores range between 300 and 850. If you have a score above 700, this will be considered good. An exceptional score is above 800 and will give you access to the best interest rates and offers from lenders. The higher your score is, the more confident a lender will be that you present a low risk to them.
Credit scores are used for many different situations, not only when buying or renting a home. Therefore, it is important to make sure your credit score is as good as it can be so that you pay less interest on any loan you take out.
What to Know About FICO Credit Scores
The FICO scoring system, created by the Fair Isaac Corporation, is probably the credit score most people think of when the subject is mentioned. It is used by many lenders, and the credit scores range from 300 to 850, with 670 being considered good.
With a score between 300 and 579, you may find it difficult to be approved for credit or have to pay an additional fee. This is considered an abysmal rating, and around and around 16% of people fall into this category.
A fair rating is a score between 580 and 669. If you try to get a mortgage, you will be seen as a subprime borrower if you have this score, and 17% of people find themselves in this situation.
With a FICO score of between 670 and 739, you fall into the good category. You will find it easier to get credit with a score in this range, and over 20% of U.S. citizens fall into this classification.
Between 740 and 799, you are rated as very good. A quarter of people applying for credit are in this range, and they are likely to get better interest rates as a consequence.
With a score between 800 and 850, you are given an exceptional rating and will get the best interest rates from lenders. 21% of people fall into this range.
Why Are Credit Scores So Important?
Credit scores are sometimes referred to as risk scores. This is because they are used to determine how likely it is you are going to repay the loan.
The best way of determining how someone will act in the future is to look at how they have acted previously. If you have a past that is full of missed payments and bad credit
decisions, it is expected you will continue this pattern. This gives lenders an easy way to discover if you will be high risk or not.
Credit scores aren’t the only factors that affect the decision by the lender, however. Your debt to income ratio is something else that is also looked at to determine if you are going
to be a safe risk or not. Lenders will use your credit score as part of their central decision of granting a mortgage preapproval.
The credit score you need to buy a home will depend on the mortgage program and lender you use. Some mortgage programs are less strict about credit scoring than others.
It is vital to know this when your credit scores are below average. An excellent mortgage broker will counsel you on what programs will work best for your situation.
You will also have trouble renting an apartment when you have bad credit as well. Hopefully, you are getting the picture on just how powerful a credit score can be.
Factors that Impact Your Credit Score
Your payment history plays the biggest part in influencing your credit score with both scoring systems. You need to avoid late payments if you want to have a good credit score.
The credit accounts you have, how old they are, and the amount you use them also plays a big role in making up your credit score. The amount of debt you have is also something that is a fairly large part of your credit score.
Less important factors that can affect your overall score include newly opened credit accounts and hard inquiries on your credit report.
Factors that Don't Alter Your Credit Score
Your race, religion, age, location, or origin, cannot be used in credit scoring formulas. They also aren't allowed to consider your gender or marital status in the credit score calculation.
Your employment doesn't factor in the credit score either. Though a lender may look at this when deciding on your application.
Any soft inquiries on your credit report aren't factored in either. These are different from the hard inquiries that will be made when you apply for credit.
How Can I Improve My Credit Score?
If you aren't happy with your credit situation, you can do a few things to improve it.
One of the biggest things you can do is to make sure you make all your credit payments on time. If you have any liens or bankruptcies in your financial history, dealing with these will improve your score.
Reducing the amount of debt you have is also a good idea. You want to avoid using all of your available credit, sticking to around 30% utilization of your maximum borrowing is advised.
Check on Your Credit Scores
When you have lofty goals, such as buying a home or a car, it is essential to keep track of your credit scores. By doing so, you will be able to have some checks and balances for improving them.
You can get a free credit report once a year from each of the three credit bureaus. A smart thing to do would be to get a credit report from each of the 3 companies every four months. That way, you can cover the entire year for free.
It makes sense to be vigilant about checking your credit report for errors, as they can negatively impact your scores. If you do find credit mistakes, you'll want to jump on getting them corrected immediately.
Final Thoughts on Good Credit Scores
Your credit score impacts so many aspects of your financial life. It pays to work on increasing your credit score as early as you can. Hopefully, after reading, you realize just how critical credit scores are in all aspects of your life. Those who pay attention to bumping up their credit scores will reap many benefits.