What Really is a Good Credit Score?

Your credit score is perhaps the most important number lenders will look at when trying to buy a home. These numbers identify you as a person who is either able, or unable to pay your debts whether they are credit cards, car, or student loans. The general rule is if your number is high, you will be fine, if it’s low, you will have trouble.

So what exactly is a good credit score?

The perfect credit score is 850, but anything above 760 is considered to be in the best range of scores. Because you have proven you can pay off your debts, mortgage lenders want to do business with you. You will also receive lower interest rates with such a high score, and this is their way of enticing you to go with them instead of another lender.

A good score is from 700 to 759; a fair score is 650 to 699. The lower scores indicate you’ve had a little trouble making payments, and lenders will assume you will struggle to make those payments as well. You can still get a mortgage with these numbers, but it will come with the cost of a higher interest rate.

Any score below 650 is deemed as poor, and you’ve had a few rough patches in your payment history. Some banks will still lend you a mortgage, but you will have to jump through a ton of hoops and pay out the wazoo in interest.

How credit scores are calculated

Three major U.S. credit bureaus track your scores; Experian, Equifax, and TransUnion. Each score is somewhat similar, but pulls its info from different sources. TransUnion looks at your job history while Equifax checks out your rent payments. Here are the variables each definitely looks at.

Payment history – 35%: Can you pay your debts on time? If you’ve never missed a payment, a 30-day delinquency can cause as much as 110 point drop in your score.

Debt-to-credit utilization – 30%: This is how much debt you have accumulated through credit cards, divided by the credit limit on the total sum of your accounts. If your ratio is above 30% it’s not working in your favor.  If you have a total credit limit of $5,000, you want no more debt than $1,500.

Length of credit history – 15%: It helps to have a track record of being a responsible borrower. The longer your record, the better your score will be.

Credit mix – 10%: Different kinds of credit work in your favor, so the more you have the better you stand. Try to diversify your credits like a car loan, retail store credit cards, installment loans, and or a previous mortgage.

New credit – 10%: If you open a bunch of new credit lines quickly this flags the mortgage lender. Don’t open a bunch of new credit lines if you are trying to buy a home because the average length of your credit history decreases.

How to check your credit score

You can and should check your credit score because you will have a better idea on how to improve it. Even if you haven’t ever been late on a payment, people still do find mistakes in their credit score. Errors do happen because creditors make mistakes in their reporting. Believe it or not, someone out there has your same name, and it could have been confused.

You can get a free copy of your credit report at AnnualCreditReport.com. This report doesn’t include your score, and for that there’s a small fee. Some credit card companies offer free access to credit reports and scores.

Just know if your score needs some help, it won’t be raised over night. Be smart with your money and pay your bills on time and there shouldn’t be much of a problem.

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