What Are Credit Scores and Why Are They Important?
Definitions and Examples of Credit Scores
A credit score is a number that evaluates and rates your creditworthiness based on your credit history. Lenders use credit scores to decide whether to approve someone for a loan or credit card and to determine what interest rate to charge. Other companies might use credit scores as well, for purposes of determining whether to rent you housing, offer you a job or how much to charge you for auto insurance.
What Is a Credit Score?
A credit score is a number that falls in the range from about 300 to 850. “Good” scores are considered to be in the 600 range. You have a better chance of being approved for loans when you have a higher score.
Lenders Use FICO Scores
Mortgage lenders typically use your FICO (Fair Isaac Corporation) score to determine if you’d be a good fit for a mortgage. Lenders have been able to identify a strong parallel between FICO credit scores and consumers’ mortgage-paying performance. However, there are three different credit bureaus that mortgage lenders will use to evaluate you for a home loan. These versions of FICO work in conjunction with the current automated underwriting systems that require the use of to determine loan eligibility.
Here are the FICO scores lenders typically use from each bureau:
- Experian: FICO score 2 based on Experian data; also known as Experian/Fair Isaac Risk Model Version 2
- Equifax: FICO score 5 based on Equifax data; also called Equifax Beacon 5.0
- TransUnion: FICO score 4 based on TransUnion data; also called TransUnion FICO Risk Score 04
Get Your Score in Shape
Because your credit scores not only determine whether you’ll qualify for a loan or not but also what interest rate you’ll pay, it’s important to get them in the best shape possible before applying for a home loan. Make your payments on time, keep your credit utilization as close to under 30 percent of your credit limit, don’t open too many credit lines in a short period of time, and have at least a year’s worth of credit history. Being proactive with protecting your credit score will not only increase your chances of getting a mortgage but will save you a huge headache down the road.