Credit matters when looking to buy a house, car, or
any other pricey asset. Unless a consumer is flush with cash, the path to home
and vehicle ownership may go through a mortgage or a loan. Good credit can
provide you with terms and privileges not available to a person with poor
credit, including lower interest rates and increased borrowing capacity.
We delve into what constitutes a good credit score
and the reasons why it is important to have a good credit score.
Related: Pros & cons of using a debit card online
What’s Considered Good Credit?
Consumers with standard credit scores of 661 or
greater are considered to have good credit, because they rank as prime or super
prime in terms of their risk assessment. A bad credit score falls
on the lower end of the range and a good credit score falls on the higher end
of the range.
Many credit scoring models, including the
standard FICO Scores and
Vantage Score 4.0, measure an individual’s credit risk on a three-digit scale
ranging from 300 to 850. The highest risk group are consumers with deep
subprime credit scores from 300 to 500, and the lowest risk group are consumers
with super prime credit scores from 781 to 850, according to Experian’s State of the Automotive Finance Market report for the
second quarter of 2021.
Consumers may build and attain good credit by
paying their bills on time, maintaining a mix of accounts, and keeping their
revolving balances under 30% of credit limits.
8 Benefits of Good Credit
Here are the eight core benefits of good credit,
which highlight why it is important to have a good credit score:
Benefit #1: Easier Access to Credit
Good credit may provide you with easier access to
additional credit. When a consumer applies for a credit card or personal loan,
lenders may analyze the consumer’s credit report and credit score to make an
informed decision on whether to approve or deny the application. A person with
good credit is considered low-risk and therefore has an easier time getting approved
for a personal loan compared to high-risk borrowers.
Benefit #2: Lower Interest Rates
Consumers with good credit may qualify for lower
interest rates when borrowing money. For example, available financing data for
new vehicle purchases in the second quarter of 2021 show consumers in the deep
subprime category of bad credit have obtained auto loans with 14.59% interest
on average. Meanwhile, consumers in the super prime category of excellent
credit secured 2.34% interest rates on average, according to Experian’s
quarterly report. That amounts to an over 12 percentage point difference in
interest rates.
Benefit #3: Lower Car Insurance Premiums
Many auto insurance companies use credit-based
insurance scores to help categorize consumers by risk and determine what
premiums they may pay. Under this practice, higher-risk consumers may pay
higher auto insurance premiums than lower-risk consumers. In some states,
having good credit or improving your credit score may lead to lower auto insurance
premiums over time.
Benefit #4: Increased Borrowing Capacity
Consumers with good credit may obtain larger credit
limits than those with poor credit. This could translate to greater spending
power on a credit card and the ability to make larger purchases on credit.
Having good credit also puts you in a better position to apply for and obtain
new credit.
A bolstered borrowing capacity is not limited to
credit cards either — credit unions and banks may offer personal loans to
consumers with good credit. Such loans can help you consolidate debt, finance
large purchases, or obtain fast cash to weather an unforeseen emergency.
Personal loans also may command lower interest rates than credit cards.
Benefit #5: Easier to Buy a Home or Car
Good credit can help you buy a house with a good mortgage
rate or a car with low financing. Borrowing money to own a home
or vehicle may come at a price that includes principal and interest. Consumers
with good credit may qualify for 0% annual percentage rate loans for a car,
where no APR means no interest or finance charges. Establishing good credit may
also improve your likelihood of obtaining a low-APR mortgage, which translates
to lower debt repayment obligations.
Automotive consumers had an average credit score of
732 for new vehicle purchases and 665 for used vehicle purchases in the second
quarter of 2021, according to Experian’s quarterly report for that period of
April through June. This shows the average automotive consumer boasted good
credit within the prime category of low risk.
Benefit #6: More Apartment Lease Options
Signing a lease to an apartment may require good
credit. Landlords who conduct credit checks might deny lease applications if a
prospective tenant has bad credit. Or those with poor credit may have to
provide a higher security deposit for rental housing compared with a
prospective tenant who boasts good credit. Tenants with good credit also may
have more leverage to negotiate for
lower rent.
Benefit #7: Helps Satisfy Employment Background
Checks
Jobseekers can benefit from good credit, as some
employers may consider a person’s credit score when making hiring decisions.
A U.S. Department of Housing and Urban Development report released
in October 2019 says that a low credit score or credit invisibility is a burden
that “can thusly limit housing choice and employment opportunity,” whereas “a
good credit score is part of the pathway to self-sufficiency and economic
opportunity.” The term “credit invisible” refers to consumers who lack a credit
score or credit history.
Benefit #8: Ability to Obtain Security Clearances
Law enforcement officers with good credit could gain
privileged access to classified national security information and FBI
facilities. Any state or local law enforcement officer seeking a security
clearance has to first satisfy a comprehensive background check that includes a
review of credit history. The FBI shares secret or top-secret information with
local law enforcement officers who have obtained security clearances.
Poor credit history would not necessarily
disqualify an officer from obtaining a security clearance, but significant
credit history issues “may prevent a clearance from being approved,” according
to information posted on the FBI’s website.
The Takeaway
Good credit is important for anyone who wishes to
borrow money to help finance key purchases. Many consumers rely upon mortgages
and loans to buy houses and cars, while many cash-strapped individuals turn to
credit cards to buy essential goods and services ranging from food and
electricity to water and rent for housing. The eight benefits of good
credit highlighted above showcase why it is critical to pay your bills on time
and practice good budgeting.
Learn more:
A guide to self-directed IRAs (SDIRA)
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score based on TransUnion™ (the “Processing Agent”) data.
More from MediaFeed:
What credit score is needed to buy a house?
What’s your number? That’s not a pickup line; it’s what a lender will want to know. The number will range from 300 to 850, and it will weigh heavily in whether you qualify for a conventional or government-backed loan and at what interest rate.
The national average credit score has inched up in the past few years, all within the range considered “good.” But applicants with “fair” and even “poor” credit scores can and do secure mortgages.
Below, we’ll cover the minimum credit score for a mortgage and how you can improve your credit score if needed.
Related: Understanding mortgage basics
Depositphotos
Lenders look at a credit score to help determine whether a potential borrower is trustworthy. Considering that the recent median home sale price was over $350,000 and that financial institutions hold about $10 trillion in mortgage debt, lenders want to know that a borrower is solid and that repayment will be made.
Credit scores were created by the Fair Isaac Corp. to put a simple numerical representation on a person’s history of obtaining and repaying debt.
There are now other institutions that also calculate credit scores, but FICO scores are the most commonly used. Experian, Transunion and Equifax are the three credit reporting agencies that collect information on your history of borrowing and then FICO or another company amalgamates the information into a score between 300 and 850.
DepositPhotos.com
In general, those with a strong history of making on-time payments on their debts will have higher credit scores. Here’s what goes into calculating a credit score:
- Payment history (35%): Considers whether the applicant has made payments on time.
- Credit utilization (30%): The ratio of how much you could borrow from all accounts vs. how much you are borrowing. The lower your credit utilization, the better.
- Length of credit history (15%): Histories with accounts that have been open for longer are seen more favorably than those that have been open for less time.
- Types of credit (10%): Having multiple types of debt is preferable. Installment credit, such as an auto loan, personal loan, student loan or mortgage loan, and revolving credit, like a credit card, are both considered.
- New inquiries (10%): Each time a new inquiry on credit is made, there can be a negative effect on a credit score. Credit inquiries happen when opening credit cards and taking out loans, and even when a lender does a “hard pull” on your credit history.
i_frontier / istockphoto
Here’s how credit scores are generally classified:
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Very poor: 300-579
In general, lenders consider applicants with “bad” or “poor” credit score subprime borrowers. Depending on what type of mortgage loan an applicant is trying to acquire, it may be hard to obtain a loan with a credit score lower than around 600.
If you are trying to acquire a conventional loan, you’ll likely need a credit score of at least 620.
With an FHA loan, 580 is the minimum credit score to qualify for the 3.5% down payment advantage. Applicants with a score as low as 500 will have to put down 10%.
The FHA program was created to get applicants with lower credit scores into homes. The loans are insured by the Federal Housing Administration, so lenders are more lenient.
A VA loan usually requires a minimum score of 580 to 620; and a USDA loan, 640.
depositphotos.com
Credit scores aren’t the only factor that lenders consider when reviewing a mortgage application. They will also require information on your employment, income, and bank accounts.
A lender facing someone with a low credit score may increase expectations in other areas like size of the down payment or income requirements.
The lowest credit scores that lenders are willing to accept change with the economic environment. During the housing crisis of 2008 and the years after, it was very difficult for borrowers with credit scores lower than 700 to obtain loans.
During better economic times, credit score requirements for borrowers may loosen. Therefore, it is a bit of a moving target to nail down the precise average or the lowest possible credit score one must have to receive a mortgage loan.
DepositPhotos.com
Working to improve a credit score before applying for a home loan could save a borrower a lot of money in interest over time. Lower rates will keep monthly payments lower or even provide the ability to pay back the loan faster.
Let’s look at an example using a mortgage calculator: If you were take out a mortgage on a $400,000 home after putting 10% down with a 4.5% interest rate on a 30-year fixed rate mortgage, your monthly payment would be $1,824 and you would pay $296,663 total in interest over the life of the loan.
If you were to take out that same loan with a 5.5% rate of interest, your monthly payment would be $2,044 and you’d pay $375,854 total in interest. The difference of 1% in interest results in almost $80,000 paid over time.
Improving your credit score will take a bit of time, but it can be done. Here’s how.
Chainarong Prasertthai // istockphoto
Reporting errors are quite common, so be certain that your credit history doesn’t mistake a missed payment or report a debt that’s not yours. You can get a free credit report
https://www.annualcreditreport.com/index.action
once a year from each of the three reporting agencies: Transunion, Experian and Equifax.
DepositPhotos.com
If you haven’t been doing so, it could take up to six months of on-time payments to see a significant improvement.
travellinglight / istockphoto
If you do not have credit established, an easy way to do so is by opening a credit card. But only do this if you are prepared to use the credit card responsibly. This means paying back the card, in full, each month. Do not simply pay the minimum payments.
If you are having trouble qualifying for a card, look into a secured credit card. With a secured card, you put a cash payment down that works as your line of credit, proving you can manage a credit card.
DepositPhotos.com
This will increase your credit utilization ratio by showing that you have lots of available credit that you don’t use. It is best to keep the credit utilization ratio below 30%, meaning you’re only using 30% of your available credit at any time.
Understand that this number can be assessed at any time during the month, not just on the day that you pay your bills. Even if you pay your cards in full every month, if you’re consistently using more than 30% of your available limit, you could get dinged.
DepositPhotos.com
If you are working to pay off credit cards, don’t close them once you’ve paid them off. Keep them open by charging a few items to the cards every month (and paying them back).
Remember, sources of debt that have been in use for longer are preferable to ones that are new. For example, if you have two credit cards, each has a credit limit of $5,000, and you have a $2,000 balance on each, you currently have a 40% credit utilization ratio. If you were to pay one of the two cards off and keep it open, your credit utilization would drop to 20%.
Depositphotos
If you have multiple credit cards and are struggling to manage them and pay them off, this might be a good solution. A personal loan may have a lower rate.
Another option for those with lower credit scores is to have a co-signer on a mortgage loan. If this person has a better credit score and financial situation than the main applicant, it could greatly improve the rate that a lender will offer. Only go down this route if this is a relationship that you can trust completely.
Once you feel that your credit score is ready, be sure to shop around for a home loan at several lenders. You want to be sure that you’re getting the best rate given your personal financial situation, and not every lender has the same criteria.
Know that even with credit scores that aren’t perfect, there are options for people who want to be homeowners; it’s just a matter of seeking out those options.
kate_sept2004/istockphoto
What credit score is needed to buy a house? The numbers hinge on the economic climate, lender and type of loan, but those with imperfect credit often manage to secure home loans. First, know your credit score, take time to improve it if needed, and compare lender offers.
Learn More:
This article
originally appeared on SoFi.comand was
syndicated by MediaFeed.org.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
Mykola Komarovskyy/shutterstock
Featured Image Credit: SIphotography/istock.
