Even though you might understand finances and banking, credit can still be a little overwhelming and complex.
But truly understanding how your credit score history can impact your mortgage eligibility and available interest rates can make things go much smoother.
Your credit score and your credit report are two separate things, according to the Consumer Financial Protection Bureau (CFPB). Your credit score is calculated from the data in your credit report.
Having a higher credit score shows a stronger credit history which impresses lenders. That makes you more eligible for lower interest rates – meaning your overall payments could be less.
“Although your credit score is one of the most important numbers, only 21 percent of consumers check their score annually, according to the Bankrate Money Pulse survey,” says Joni Utnage, Vice President & Mortgage Originator at Busey Home Mortgage in Champaign, Ill.
“Not only does your credit score affect your mortgage interest rate, it can also impact your rate for mortgage, car and home insurance, certain job prospects and even for the rental you want.”
What is a credit score?
“A credit score indicates to lenders how much of a credit risk you pose if they allow you to borrow money,” she says.
Credit scores reflect the information in your credit report—do you pay your bills on time and how much of your available credit do you use? You are encouraged to check your credit report for accuracy at least once a year.
What is a good credit score?
A credit score can range from 300 to 850, depending on the rating industry. A FICO® (Fair Isaac Corporation) Score of 700 or above is considered good, and a score above 800 is considered exceptional, Utnage explains.
While FICO is the more widely known credit scoring option, VantageScore is gaining popularity. A VantageScore above 700 is considered good while above 750 is excellent.
See the outline below from Experian.com:
Exceptional 800-850 (20% of consumers) Exceptional 750-850 (30% of consumers)
Very Good 740-799 (18% of consumers) Very Good 700-749 (13% of consumers)
Good 670-739 (22% of consumers) Fair 650-669 (18% of consumers)
Fair 580-669 (20% of consumers) Poor 550-649 (34% of consumers)
Very Poor 300-579 (17% of consumers) Very Poor 300-549 (17% of consumers)
FICO and VantageScore use an algorithm that takes into account 30 different factors within your credit report to arrive at a score. The higher the score, the lower the credit risk to lenders, Utnage says.
What are the three credit bureaus, and what do they do?
In the U.S., there are three national credit bureaus (Equifax, Experian and TransUnion) that compete to capture, update and store credit histories on most consumers.
While most of the information collected on consumers by the three credit bureaus is similar, there are differences — as a result, there are different scores between the three.
Do lenders give discounts to people with much higher credit scores?
Interest rates and mortgage insurance rates use credit scores. In order to have the best interest rate on a conventional loan, for example, a person wants a score of at least 740 but at least 760 for private mortgage insurance (PMI).
A lower score can mean higher rates on both the interest rate and on PMI, as well as higher home insurance cost, Utnage explains.
If you apply for a mortgage with a spouse or a significant other, how do the underwriters handle which credit score is used or is it a combination of the two?
Mortgage lenders use the middle score of the weakest borrower, she says.
So, if husband and wife apply jointly, and the husband has a middle score of 680 and the wife has 800, the interest rate/private mortgage insurance rate will be chosen based on the lower score of the two.
Automated underwriting engines such as Loan Prospector and Desktop Underwriter will evaluate the loan based on the lower score, as well.
What are some of the mistakes people make that impact their credit score, but they don’t even know it?
Utnage says that maxing out credit cards can impact the score almost as much as a missed payment. Disputing medical bills or erroneous bills, and refusal of any bill, erroneous or not, can result in a collection on the credit report.
Also, when you buy a car the dealer usually sends the loan application to multiple sources to pull your credit. Instead, ask the dealer to limit the number of sources so that inquiries are kept to a minimum.
Are there things that can happen to make someone’s credit score plummet but they didn’t do anything to cause that?
If your credit score drops, there is usually a cause. Although it may be hard to pinpoint the exact reason, here are some examples, Utnage adds:
- A store goes out of business and closes your card. If there is a balance and you are allowed to continue paying it off, the line is closed so the balance will always be the limit. You will always be maxed out.
- Your credit limit was lowered on a card.
- Identity theft.
- Your mortgage gets sold and an account is showing paid before another is showing open. This scenario could result in temporary drop, but it would be minor.
- A collection drops off of your credit report.
- Bankruptcy is removed from your credit report. When a bankruptcy falls off of your credit report after 10 years, you will likely move to a new credit scorecard.
How can someone increase their credit score pretty quickly?
Utnage says that someone can eliminate debt; reduce revolving debt to 30% of limit; increase credit limits on revolving cards; report errors in writing; keep old accounts on report because longer history helps the score; and pay your bills on time or before the due date.
What are some of the other ways someone could increase their score?
“Becoming an authorized user on someone’s account can raise your score,” she says. “However, lenders are catching on. In some cases, it may not work in your favor due to manual underwriting requirements.”
You can also strategically open accounts and apply for credit sparingly, she adds.