What Is a Good Credit Score?
A good credit score is essential if you are looking to apply for a home loan. It is a major deciding factor used by the lending institutes when it comes to approving or declining a credit card, loan, or mortgage application.
Different credit scores
The majority of credit score companies rely on a ratings range of 300 to 850. This is a good indication of a person’s credit and can quickly tell whether it is excellent or very bad. A typical credit score is broken down into the following bands :
- 750 or more is rated as excellent
- 700 – 749 is good
- 650 – 699 is fair
- 600 – 649 is poor
- 600 or below is bad
However, the credit scores can be interpreted differently by lenders and have their own definition of an acceptable risk. For instance, a very selective lender may only be willing to accept applicants with a credit score of 750 or more, while the lender looking to take on more clients may be willing to lower the acceptable score to 680 or less.
While it may be possible to obtain a line of credit with a less favorable credit score of 650, there is a very high chance of this being subject to special terms, such as a high interest rate. Most mortgage lenders make use of the FICO credit score to help decide on the eligibility of a borrower.
So if you are looking to apply for a home mortgage, higher credit score is certain to make the entire approval process a lot more straightforward, while also getting to benefit from the most attractive interest rates.
Why it benefits to maintain a good credit score
A high credit score makes it possible to benefit from the best terms and conditions offered by a mortgage lender. The ability to enjoy a low interest rate for the duration of a mortgage can lead to very good savings over the long-term. For instance, if you are looking to apply for a $250,000 home with a fixed, 30-year mortgage and a good/excellent credit score, there is the potential to pay nearly $75,000 less compared to someone else with a bad credit rating. For this reason, it really makes sense to know and understand your credit score.
Continue to monitor your credit score
One method to keep your credit score in good standing is to continue to monitor your progress over a period of time. Also, it helps to look beyond the three-digit number that gives an overview of your credit score. You want to look out for anything noted as a risk factor which can be a loan or credit card debt that is starting to get high.
Even though the credit scores may vary slightly with the different bureaus, the numbers are typically based on five specific categories:
- 35% of the account relates to payment history
- 30% of the account relates to credit utilization
- 15% of the account relates to length of credit history
- 10% of the account relates to mix of accounts
- 10% of the account relates to new credit inquiries
So, the process of building and maintaining a good credit score is achieved by keeping total debt to less than 30% of total credit (preferably at 10%), make payments on time, control new credit applications, and hold a mixture of accounts.