What to Know About Credit Scoring
Credit scores are used to predict how likely you are to pay back funds on time, so making sure you have a good credit score will make lenders much more comfortable with lending money to you.
Anything you do can and will affect your credit score both negatively and positively. If you plan on buying a house for the first time, it is vital to know that your credit score can significantly impact the interest rate the lender gives you.
When getting approved for a mortgage, your scores could mean the difference of thousands of dollars over the life of the loan. So understanding what can affect this as well as what you can do to get a good credit score is going to be vital.
In this article, I’m going to go over the basics of a credit score so you can better understand what a good credit score looks like.
If you haven't got the time, here's a quick answer:
- The FICO says a credit score that is considered to be good is anything from 670 and up. Anything below that is bad and probably will hold you back from getting the loan you need.
- Vantage Scores are pretty similar, although they consider anything above 661 to be a good credit score, and anything below that is a bad credit score.
To get the best rates and terms on a home mortgage loan, you will want to strive for a score above 720. Getting above this figure is where lenders will really reward you.
Good Credit Score Basics
Your credit score isn't some random number you’re assigned. It's a number that is given to you based on what you do with your finances. This is something I'll talk in much more detail about later.
The Consumer Financial Protection Bureau or CFPB states that scores are based on your own credit score reports, which companies like FICO and VantageScore use alongside complex formulas to help give a person a credit score.
What is FICO
FICO has been credited with creating the first standardized scoring model to give people their financial credit scores.
Although it has been around for more than 30 years, Fair Isaac Corporation has a very similar scoring model to it did when it first launched all those years ago; they claim to be used in 90% of lending decisions in the USA.
A Good FICO Credit Score
When it comes to judging your score, FICO considers anything between 670 and 739 to be a good credit score, as these numbers are slightly above the average of people in the U.S.
Of course, anything above this credit score range is considered to be very good or exceptional, and anything below is considered fair or poor and will mean you will struggle to find a lender that will take the risk of giving you the funds you need.
What is VantageScore
VantageScore hasn't been in the game as long as the FICO has. It has only been in existence since 2006 but has since become one of the direct competitors of Fair Isaac Corporation.
It is managed independently but was founded by the 3 major credit bureaus, Equifax, TransUnion, and Experian. This is notable since these bureaus are the ones supplying the credit reports which we mentioned earlier.
Although VantageScore isn't as widely used as its competitor, the 3 bureaus behind the scoring model state that you will get much more accurate and consistent scores since it's using data from all bureaus and not just one of them.
A Good VantageScore Credit Score
When it comes to the VantageScore system, a score between 661 and 780 is considered good, with anything below that being poor, resulting in your not being able to obtain the loan you need.
And of course, anything above this number range is considered exceptional, and you should find it a breeze to obtain the mortgage you're looking for as long as you have the income to support it.
Factors That Can Affect Your Credit Score
We’ve spoken about the different scoring models, who are behind them, and what good score ranges look like for each, but what exactly affects your credit score?
Knowing this will be the key if you’re looking to secure a mortgage on your dream home or take out a loan for a renovation on your current property.
Here are some factors which will be combined to calculate your credit score:
- PAYMENT HISTORY: This is based on the size of payments you’ve made during your history and if you’ve paid them on time or not.
- PREVIOUS LOANS: How many loans you’ve had and what exactly they were will affect your credit score; depending on the combination, these things can make you more or less likely to get the loan you’re looking for even if you’ve paid back on time.
- DEBT YOU CURRENTLY HAVE: How much money you have left to pay on your current debts as well as what they might be/for.
- CREDIT AGE: How long you've had your accounts open. Though sometimes this does not take into account all of your histories, and might only feature the last 5 to 10 years or so, or not even that. It all depends on what appears in your credit history.
- CREDIT UTILIZATION: A ratio reflecting how much credit you’re using against the amount you currently have available.
- CREDIT APPLICATIONS YOU’VE APPLIED FOR: How many times in recent history you’ve applied for new credit - the effect this has on your score is usually pretty minor. However, a lot of new requests could still give a bad impression to money lenders.
How to Build a Good Credit Score
So, you know a couple of key aspects that will affect your overall credit score. How do you make sure that these are affecting you in the best way possible? How do you build a good credit score?
Here are some of the ways which the CFPB point to when people ask how they should get a better credit score:
- ALWAYS PAY YOUR BILLS ON TIME: This is a given; but if you really want to have a positive effect on your own credit score, you should be making sure you’re paying your bills on time - set them up as automatic payments or at least set yourself a reminder on your phone so you never forget.
- PAY CLOSE ATTENTION TO YOUR CREDIT HISTORY: Make sure you’re showing good credit habits over a long period of time, as this will make it more likely for you to land the loan you want with a lender.
- AVOID YOUR CREDIT LIMIT: Make sure you’re not using up all your credit at one time. Stay below 30% seems to be the happy ratio if you’re looking to get and keep a good credit score.
- APPLY ONLY FOR WHAT YOU NEED: This may be obvious, but you should only be applying for the credit you need, so don’t apply for credit cards or loans you have no business using.
- CHECK YOUR CREDIT REPORTS: Errors can happen, so checking your credit reports often can keep you in the know, and if you do see errors, you can get them resolved as soon as possible, so they’re not affecting you later in life when you actually want to get a sizable loan.
Use a Credit Improvement Company
If your credit scores need a bit of work, but you're not sure how to get your scores boosted quickly, a company like Credit Karma could really come in handy. Credit Karma is an excellent tool that helps guide you in making the best credit decisions. Their site is free to use. By signing up for an account, you will be provided with the necessary information to make the right credit decisions instead of shooting from the hip.
Overtime by following Credit Karma's advice, you will see your credit scores improve. Eventually, they will get to the point where you will be truly proud of yourself. In fact, you may be calling a real estate agent to start looking at homes.
By working on your credit early on later on in life, you'll be debating whether you should pay off your mortgage or not rather than worrying about your financial stability.
Getting a good credit score is an important life achievement. Many are not fortunate to have excellent credit scores. By understanding the value of a high credit score, you can put yourself in a better position to get many of the things most people strive for, such as a nice home and car.
Hopefully, you have enjoyed these tips on a good credit score and how you can get one.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.