For finances and all that it entails, one’s credit score remains an integral part of what to take into recognition.
Financial institutions, lenders, employers, the government, e.t.c takes into recognition one’s credit score before rendering certain help or services to you.
In this article, we shall detail and answer questions bordering on what is a good credit score? What do we consider as a good credit score and what is a good credit score to buy a house? What is a perfect credit score as well as how to achieve a good credit score?
Through the help of our research associates and industry experts, we have been able to break down all you need to know about credit scores and how to calculate credit scores.
Table of contents
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What is a Credit Score?
A credit score can be simply put as a number between 300 and 850 used in representing the range of one’s creditworthiness.
Your credit score is gotten through information obtained from one’s financial transactions history.
The digitization of the financial sector has made it quite easier to access the credit scores of individuals.
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How is Credit Score Calculated?
Having explained what we mean by credit score, it is only right we tell you how the range of credit scores are arrived at. Lenders and institutions use the percentage of certain financial activities as listed below.
- Payment history (35%)
- Amount owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
Payment History:
Your credit history takes note of how often you pay up loans. It shows details of payments you missed, the number of credit accounts you have, and how you keep up with them.
Additionally, details of wage attachments, foreclosures, bankruptcies as well as home equity loans are all in the payment history.
Therefore, you are most likely to earn the trust of a lender if you keep a good or average payment history. Vice versa.
In fact, what has been considered a good credit score is good payment history.
Amount owed:
Another vital aspect of your credit score is the amount you currently owe. This is checked in relative to the amount you are currently worth.
Here, lenders seek to know if you are living above your credit limit or within the prescribed 30 percent ratio.
In addition to that, the number of accounts you currently run also plays a huge role.
If you are in huge debts in many of the accounts you run, it does not portray a good credit score for you.
Length of credit history:
What is calculated here is how long you have maintained a good credit history.
Someone that has maintained a good credit history for over 8 years will score more point than someone that maintained a good credit history for 3 years.
Credit Mix:
Though it makes up for just 5%. of what is considered a good credit score, it is, however, important you show good handling of multiple credit units.
Credit mix here refers to how you can manage multiple credit units like credit cards, retail store cards, gas station cards, lines of credit.
It also takes into cognizance your handling of car loans, student loans, Mortgages, e.t.c.
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New credit:
New Credit refers to how often you apply for loans and credit. If you are in the habit of applying for loans frequently, it will hurt your credit score.
Because it shows the lender you can be unreliable and lives off credit.
The credit score calculator takes note of all of this while determining the range of your credit score.
There are many analytic companies for credit scores. Platforms like Vantage and FICO helps out a lot if you want to calculate credit score online.
What is a Good Credit Score?
Like we said earlier, credit scores range from 300 to 850. In this range, the higher the number the better the credit score. While the lower the number, the more unhealthy your credit score becomes.
Although range variation largely depends on the scoring model.
Generally, individuals with credit scores in the range of 580-669 are considered fair, 670 to 739 are considered good; 740 to 799 are considered very good.
Those in the 800 range are considered excellent and more likely to get quick loan approval.
Additionally, based on the type of loan applied, some creditors might not consider all the five components mentioned earlier ( Payment History, Amount owed, Length of Credit History, Credit mix, New Mix).
However, just like we said earlier it depends on the type of loan applied. Some creditors also differ on the range, some consider 580-669 as a red flag while others consider 580-669 fair enough.
How to achieve a Good Credit Score
Reaching a good credit score is quite achievable and would require a good deal of financial discipline.
Ensure you try as much as you can to always check your credit history. Look at the places you are defaulting and try to make amends.
In addition to that, we have also listed some things to do if you are looking at how to achieve a good credit score.
Timely Payment of Bills: Lenders will always look at how quickly you respond to bills. Late payment or skipped payments are reported to credit bureaus which in turn affects your creditworthiness. Ensure you update your lender on reasons why you are late on your such payment.
Timely Payment of Debts: If you are looking at achieving a good credit score, ensure you pay off your debts as quickly as you can after borrowing.
Keep your Credit Card Balance Below the Limit: If lenders find out you spend well above your credit limit it will score badly on your creditworthiness. Therefore, the rate at which you utilize your credit has a significant effect on your credit score. Ensure you maintain way below the limit or just within it.
Keep a regular check on your Credit Score: It is highly recommended you frequently request your credit report from the credit bureau. This is to ensure that there is no incomplete or inaccurate information detailed in the report.
What is a Good Credit Score to Buy a House?
The minimum credit score required to obtain a mortgage depends on the type of loan you intend to go for.
Applicants are presented with the option of VA, Conventional, or FHA Loans. Each has requirements before your application for loan can be approved.
However, on average, the minimum credit score required to buy a home is 620. Anything below that is most likely to attract a high-interest rate.
Conventional Loans:
Conventional loans are those not insured by the government. Private institutions offer them.
To get these types of loans your credit score should well above 700. They offer good flexible payment plans and is pretty much the most commonly used amongst those with good credit scores.
FHA Loans:
FHA is insured by the government. Down payment is as low as 3.5% and also allows a refinance of up to 97% of the house value.
FHA is best for those with lower credit scores. What is considered a good credit score for FHA loans is 580 or 620.
VA:
If you are a veteran or the spouse of a veteran this might be the right loan for you.
With a credit score as low as 580 lower you can qualify for this mortgage plan. There seem to be no set minimum requirement for VA loans in some cases.
However, you must be a US veteran, service member, or spouse to a veteran to qualify.
USDA Loans:
The minimum credit score to buy a house under USDA loans is 620 or well above 600. USDA loans are government-backed mortgage options.
In Conclusion
Excellent credit scores are not achieved overnight you have to deploy the best of financial discipline if you want to rank a good credit score.
Always check up on your credit report and maintain close contact with your lender regarding late payment and loan defaults.
Keep up with this practice if you are looking at achieving a good credit score.
FAQs
A minimum credit score of 660 is decent enough to get a car.
A score well above 700 is considered excellent.
609 letter is a dispute letter that forces the credit agencies to remove certain negative details on your credit report to raise your credit score.
References
- What Credit Score Do You Need to Buy a House in 2023? | Quicken Loans
- What Is a Good Credit Score? – Experian
- How Are Credit Scores Calculated? | Equifax®
