What you need to know about credit scoring
Credit scores are used to predict the likelihood that you will repay the funds on time, so make sure you have a good credit score so that lenders feel much more comfortable lending you money.
Anything you do can and will affect your credit score in both negative and positive ways. If you plan to buy a house for the first time, it is essential to know that your credit score can have a significant impact on the interest rate that the lender gives you.
When get mortgage approval, your scores could mean the difference of thousands of dollars over the life of the loan. It will therefore be essential to understand what can affect this as well as what you can do to achieve a good credit rating.
In this article, I’m going to go over the basics of a credit score so that you can better understand what a good credit score looks like.
If you don’t have time, here’s a quick answer:
- The FICO says that a credit score considered good is 670 and above. Anything below is bad and will likely prevent you from getting the loan you need.
- Vantage scores are quite similar, although they consider anything above 661 a good credit score, and anything below a bad credit score.
To get the best rates and terms on a mortgage, you’ll want to strive for a score above 720. Exceeding that number is where lenders will really reward you.
The Basics of a Good Credit Score
Your credit score is not a random number assigned to you. It’s a number assigned to you based on what you do with your finances. This is something that I will discuss in more detail later.
The Consumer Financial Protection Bureau or CFPB states that scores are based on your own credit 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 over 30 years, Fair Isaac Corporation has a very similar scoring model to its launch all those years ago; they claim to be used in 90% of loan decisions in the United States.
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 because those numbers are slightly higher than the average for people in the United States.
Of course, all that is above credit score range is rated as very good or outstanding, and anything below is rated as fair or poor and will mean you will be hard pressed to find a lender who will risk giving you the funds you need.
What is VantageScore
VantageScore hasn’t been in the game for as long as FICO. It has only been around since 2006, but has since become a direct competitor of Fair Isaac Corporation.
It is independently managed but was founded by the 3 major credit bureaus, Equifax, TransUnion and Experian. This is remarkable since these bureaus are the ones that provide the credit reports that we mentioned earlier.
While VantageScore is not as widely used as its competitor, the 3 bureaus behind the scoring model indicate that you will get much more accurate and consistent scores because it uses data from all the bureaus and not just one of them. between 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 mediocre making it difficult for you to get the loan you need.
And of course anything above that range of numbers is considered exceptional, and you should find it a snap to get the mortgage you are looking for as long as you have the income to back it up.
Factors That Can Affect Your Credit Score
We’ve talked about the different scoring models, who are behind them and what the right score ranges look like for each, but what exactly affects your credit score?
Knowledge will be key whether you are looking to secure a mortgage on your dream home or take out a loan for a renovation of your current property.
Here are some factors that will be combined to calculate your credit score:
- PAYMENT HISTORY: This is based on the size of the payments you have made during your history and whether you paid them on time or not.
- PREVIOUS LOANS: The number of loans you have made and their exact amount will affect your credit score; depending on the combination, these items can make you more or less likely to get the loan you are looking for, even if you have paid it back on time.
- DEBT YOU CURRENTLY HAVE: How much money do you have left to pay on your current debts and what they might be / for what.
- CREDIT AGE: how long your accounts have been open. Although sometimes it doesn’t factor in all of your stories and only showcases the past 5-10 years or so, or not even that. It all depends on what shows up in your credit history.
- CREDIT UTILIZATION: A ratio of how much credit you use to the amount you currently have.
- CREDIT APPLICATIONS YOU HAVE ASKED FOR: How many times in recent history have you applied for new credit – the effect this has on your score is usually quite minor. However, many new applications could still give lenders a bad impression.
How to build a good credit score
So, you know a few key aspects that will affect your overall credit score. How do you make sure these affect you in the best possible way? How do you build a good credit score?
Here are some of the ways the CFPB indicates when people ask how they should get a better credit score:
- ALWAYS PAY YOUR BILLS ON TIME: It’s a no-brainer; but if you really want to have a positive effect on your own credit score, you need to make sure you pay your bills on time – set them up as automatic payments or at least set yourself a reminder on your phone so you never forget .
- BE CAREFUL OF YOUR CREDIT HISTORY: Make sure you have good credit habits over a long period of time, as this will make you more likely to get the loan you want from a lender.
- AVOID YOUR CREDIT LIMIT: Make sure you don’t use up all of your credit at once. Staying below 30% seems like the right ratio if you are looking to achieve and maintain a good credit rating.
- ASK ONLY FOR WHAT YOU NEED: It may be obvious, but you should only apply for the credit you need, so don’t apply for credit cards or loans that you don’t have a business.
- CHECK YOUR CREDIT REPORTS: Errors can happen, so checking your credit reports can often keep you up to date, and if you find any errors you can resolve them ASAP, so they don’t affect you later in the day. life when you actually want to get a big loan.
Use a credit improvement company
If your credit scores take a bit of work, but you don’t know how to increase your scores fast, a company like Credit Karma could really be of use to you. Credit Karma is a great tool that helps you make the best credit decisions. Their site is free. By signing up for an account, you will be given the information you need to make the right credit decisions instead of drawing hip.
Over time, by following the advice of Credit Karma, you will see your credit rating improve. Eventually, they’ll get to the point where you’ll be really proud of yourself. In fact, you might be calling a real estate agent to start looking for homes.
As you work on your credit earlier in life, you will be struggling whether you have to pay off your mortgage or not rather than worrying about your financial stability.
Getting a good credit score is an important achievement in life. Many are not fortunate enough 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 crave for, like a nice house and a nice car.
Hope you enjoyed these tips on a good credit score and how you can get one.