Hoping to buy a home? One number you’ll want to get to know well is your credit score. Also called a credit rating or FICO score (named after the company that created it, the Fair Isaac Corporation), this three-digit number is a numerical representation of your credit report that outlines your history of paying off debts. Why does your credit score matter?
Because when you apply for a mortgage to buy a home, lenders want some reassurance a borrower will repay them later. One way they assess this is to check your creditworthiness by scrutinizing your credit report and score carefully.
A high FICO rating proves you have reliably paid off past debts, whether they’re from a credit card or college loan. (Insurance companies also use more targeted, industry-specific FICO credit scores to gauge whom they should insure.) Here, realtor.com tells you what type of score is best to buy a house.
Inside your credit score
A credit score can range from 300 to 850, with 850 being a perfect credit score. While each creditor might have subtle differences in what they deem a good or great score, in general an excellent credit score is anything from 750 to 850.
A good credit score is from 700 to 749; a fair credit score, 650 to 699. A credit score lower than 650 is regarded as poor, meaning your credit history has had some difficulties. Although FICO score requirements will vary among lenders, generally a good or excellent credit score means you’ll have little trouble if you hope to obtain a home loan.
Lenders will want the business of home buyers with good credit, and may try to entice them to sign on with them by offering loans with the lowest interest rates. Since a lower credit score means a borrower has had some late payments or other dings on their credit report, a lender may see this consumer as more likely to default on their home loan.
All that said, a low credit score doesn’t necessarily mean you can’t score a loan, but it may be tough. They may still give you a mortgage, but it may be a subprime loan with a higher interest rate.
How your score is calculated
Credit scores are calculated by three major U.S. credit bureaus: Experian, Equifax, and TransUnion. All three credit-reporting agency scores should be similar, although each pulls from slightly different sources. For example, Experian looks at rent payments, while TransUnion checks your employment history.
These reports are extremely detailed—for instance, if you paid a car loan bill late five years ago, an Experian report can pinpoint the exact month that happened. By and large, here are the main variables that the credit bureaus use to determine a consumer credit score, and to what degree:
Payment history (35 percent): This is whether you’ve made debt payments on time. If you’ve never missed a payment, a 30-day delinquency can cause as much as a 90- to 110-point drop in your score.
Debt-to-credit utilization (30 percent): This is how much debt a consumer has accumulated on their credit card accounts, divided by the credit limit on the sum of those accounts. Ratios above 30 percent work against you, so if you have a total credit limit of $5,000 you’ll want to be in debt no more than $1,500 when you apply for a home loan.
Length of credit history (15 percent): It’s beneficial for a consumer to have a track record of being a responsible credit user. A longer payment history boosts your score. Those without a long enough credit history to build a good score can consider alternate credit-scoring methods such as the VantageScore. VantageScore can reportedly establish a credit score in as little as one month; whereas FICO requires about six months of credit history.
Credit mix (10 percent): Your credit score rises if you have a significant combination of different types of credit card accounts, such as credit cards, retail store credit cards, installment loans and a previous or current home loan.
New credit accounts (10 percent): Research shows that opening several new credit card accounts within a short period of time represents greater risk to the lender, according to myFICO, so avoid applying for new credit cards if you’re about to purchase a home. Also, each time you open a new credit line, the average length of your credit history decreases (further hurting your credit score).
How to check your credit score
Now that you know exactly what’s considered a good credit rating, you can find out your own credit score by getting a free credit score online at CreditKarma.com. You also can check with your credit card company, since some (like Discover and Capital One) offer a free credit score as well as credit reports so you can conduct your own credit check.
Another way to check what’s on your credit report—including credit problems that are dragging down your credit score—is to get your free copy at AnnualCreditReport.com. Each credit-reporting agency (Experian, Equifax, and TransUnion) also may provide credit reports and scores, but these may often entail a fee.
Plus, you should know that a credit report or score from any one of these bureaus may be detailed, but may not be considered as complete as those by FICO, since FICO compiles data from all three credit bureaus in one comprehensive credit report.