Credit Scores 101

If you want to be approved for a home loan, you need a credit score, so let’s go over the basics with Credit Scores 101.

First, What’s a Credit Score?

A credit score is a number between 300 and 850 that’s assigned to you to help a lender gauge your creditworthiness. Sounds simple enough, but behind this number is a lot of statistical data. All that data gets fed into a credit scoring system to tell lenders how likely you are to make good on your loan. The higher your score is, the more creditworthy you are and the easier it is to get approved for credit and qualify for low interest rates.

What’s a Good Credit Score?

Between the extremes of 350 and 800, credit scores tend to fall into several categories ranging from poor on the low end to excellent at the top:

  • 720–850 Excellent
  • 680–719 Good
  • 620–679 Average
  • 580–619 Fair
  • 350–579 Poor

These ranges are not necessarily universal, so ask your mortgage loan officer to know where you stand. For instance, one lender’s “average” may end up being another lender’s “fair” credit score.

Who Decides What My Credit Score Is?

There are several credit scoring systems out there, but the most common is known as the FICO score, created by the Fair Isaac Corporation. This is usually the score you’ll see when you request a copy of your credit report from one of the big three credit reporting agencies — Experian, TransUnion, and Equifax. These are the agencies that provide your score to lenders.

What Determines the Score Assigned to Me?

There are several weighted factors that go into deciding your FICO credit score. Let’s go over what they are and what they mean.

Payment History (35%) – As you can see, paying your bills on time is the most important factor for your score accounting for 35% of it. You also want to make sure you pay at least the minimum monthly payment on any credit cards to not be penalized here.

Credit Utilization (30%) – There’s a bit of a Goldilocks zone when it comes to credit utilization. You don’t help your score by not using your available credit, but you’ll be penalized for having too high of a debt-to-credit ratio. Using around 10–20% of your available credit is said to be ideal.

Length of Credit History (15%) – Your credit history is built over time. A long history of on-time payments and regular credit use adds up. Want a score over 800? That usually takes 10 years of good credit history to achieve. Want to max out at 850? You’ll need more than 20 years of awesome credit management.

New Credit (10%) – You don’t want to open too many new credit cards or apply for too many loans all at once.

Types of Credit (10%) – Multiple account types help your credit score if you’re able to manage a couple credit cards and an auto loan responsibly.

What Do Mortgage Lenders Actually Want to See?

Low balances, a long record of paying all your bills on time, and responsibly managing a few credit cards and a car loan, will go a long way towards helping your mortgage loan application.

What Score Do I Need for a Mortgage?

What’s the magic number for getting your mortgage application approved? A credit score of 600 is generally the lowest you can go and still have hope of being approved for a loan. Around 600 will result in a higher interest rate and may be required to pay a higher down payment just to be approved. Above 620 and your options will start to open up. You’ll have access to better interest rates and more choices when it comes to loan programs. You enter into the good credit zone around 680–719, which again gives you more options and better rates.

Once your credit score tops 720, you generally have access to lenders best rates, reserved for borrowers with excellent credit. It’s really worth the effort to improve your credit score, especially if you’re on the line between “good” and “excellent” — it could save you tens of thousands of dollars in interest over the course of a 30-year mortgage.

Your next step? Find out where your credit score stands now and what you can do to improve it.