When it comes to mortgage lending, your credit score is a significant factor that determines your creditworthiness. This carefully calculated number has a pivotal role in the potential mortgage rates you could qualify for when buying a home for the first time.
A survey conducted by Wyndham Capital Mortgage and Atomik Research in Spring 2021 tested American’s financial knowledge about mortgages. From this survey, we discovered that only 60 percent of respondents knew a credit score of 650 can be considered “good,” while 56 percent knew a score between 720-760 can be considered “excellent.”*
To look at it another way, the survey indicates that nearly half of all respondents are unfamiliar with the credit score basics that determine what is, for many, the biggest financial decisions of their lives.
Today, we’ll walk you through the credit score basics, from the financial factors you need to know to how your credit score affects mortgage interest rates and how to monitor your credit score so when the time comes to buy a home, your financial portfolio is firing on all cylinders.
Credit Score Basics
In 1958, the first credit scoring model by Fair, Isaac and Company (FICO®) was introduced as a way for lenders to make decisions about a consumer’s creditworthiness. Today, there are multiple credit scoring models lenders can use to determine borrower risk, including FICO®’s model, and VantageScore®.
How are credit scores calculated?
Let’s break down the FICO® credit scoring model since it’s one of the most common. FICO® scores are calculated using five factors broken up by percentages:
- Payment History (35%) – Bills paid on time and late. Includes foreclosures, bankruptcies, liens and lawsuits.
- Credit Utilization (30%) – How much of your available credit is used every month. Utilizing 30 percent or less of your credit limit is ideal. For example, if your credit limit is $1,000, spending $300 or less will keep you at or under 30 percent credit utilization.
- Credit History (15%) – Age of credit cards and accounts. Older credit cards with low or no balances can actually be good for your credit.
- Credit Use (10%) – Also known as “Account Mix,” or the blend of credit accounts you have. This includes credit cards, loans (home, auto, student, personal).
- New Credit (10%) – This includes credit applications (applying for a home or auto loan, credit card), in-store financing. Too many new credit inquiries can negatively impact your credit score.
What is a good credit score?
As a potential borrower, it’s imperative to know what a good credit score is and where your credit score lies on the scale. It’s also important to note that credit score ranges vary slightly from one lender, creditor, industry and scoring system to the next. For instance, average FICO® scores are broken up the following way:
- Poor (300-579)
- Fair (580-669)
- Good (670-739)
- Very Good (740-799)
- Excellent (800-850)
Although FICO® views a 650 credit score as “fair,” Wyndham Capital views it as “good.” VantageScore would view a 650 as “non-prime,” though their scale is based up to 990 rather than 850. VantageScore also uses different percentages and financial factors to calculate their scores. Regardless, the higher your credit score is, the better.
What is the average credit score in America?
As of May of 2021, Forbes Advisor reported the average credit score in the United States is 711. For many lenders and creditors, this is considered a “good” credit score.
How can I check my credit score?
Wondering how your credit stacks up? Know what resources are available, like your Annual Credit Report. You can obtain a copy of your credit report at no charge every 12 months. This report gives you the current credit score lenders would use to determine your creditworthiness.
Aside from this credit report, other credit monitoring services can help keep you “in the loop” with your finances as you work to meet your financial goals, including the credit score basics that determine your overall score. But keep in mind, this particular service may come with additional fees.
In a time where 85 percent of Americans still believe that homeownership is a wise investment*, knowing what a good credit score is and ultimately, what you need to do to have a good credit score, could make all the difference in your journey toward homeownership. Luckily, you’ve got Wyndham Capital to help guide you along the way.
*Wyndham Capital Mortgage Data Source: WCM’s Mortgage 101 online survey was given to 2,342 adults in the United States. The margin of error fell within +/- 2 percentage points with a confidence interval of 95 percent. The fieldwork took place between March 23rd and March 29th, 2021. This survey was commissioned and conducted by an independent creative market research agency.
**Example of a 30-year fixed payment: $360,000 loan amount, 360 payments of $1,349 not including taxes, insurance, and HOA dues, at 3.010% APR.