For most, a credit score isn’t something you’re thinking about on a daily basis. However, when you decide it’s time to be a first-time home buyer, it becomes extremely important and many people wonder what’s a good credit score?
The answer itself isn’t complicated. However, there are a few things to know about what affect your credit score most (good and bad).
First things first.
What’s a Good Credit Score?
When it comes to credit scores there are five ranges you can fit into:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Excellent
These numbers come from Equifax. However, while different organizations and lenders might have slightly varied ranges, they all fall close to those listed above.
When it comes to buying a home, a credit score of at least 620 is usually required to access decent rates without added fees. However, the higher your score, the better interest rates you will be offered.
The Five C’s of Credit
When deciding whether or not to lend, the five C’s of credit are used to determine the trustworthiness of the loanee. They give lenders a good sense of the borrowers ability to make consistent, on-time payments.
- Character: Credit history
- Capacity: Debt-to-income ratio
- Capital: Amount of money
- Collateral: Assets
- Condition: Purpose, amount, and interest rate on the loan
The five C’s of credit are used in conjunction with your credit report (often referred to as the sixth C).
How Is A Credit Score Calculated?
Just like the five C’s, there are five factors that influence your credit score:
Payment History (35%)
The biggest factor when it comes to your credit score. Your payment history includes reporting on the number credit accounts have and pay on time along with details on missed or late payments.
This can include credit cards, home equity loans, student loans, auto loans, finance company accounts, and mortgage loans for any properties (primary, secondary, vacation, and investment).
Used vs. Available Credit (30%)
Also taking up a large portion of your report, used vs. available credit analyzes how much is being used on all revolving lines of credit. Revolving lines of credit are loans that can be reused up to a limit.
Total line of credit and your credit limit are also included in this factor.
Credit History (15%)
Lenders like to see that borrowers have been able to make payments over a long period of time. So, this factor looks at how long the oldest account was opened along with how recently a line of credit was added.
Public Records (10%)
Lenders assess risk by looking at bankruptcy history, collection issues, or other negative public records.
The final piece of the pie are called “hard inquiries”, and it is one of the most misunderstood components of your score’s algorithm. When applying for new credit, the lender will order a credit inquiry. This hard inquiry will affect your score. However, the algorithm is designed to recognize if you’re shopping and visiting multiple brands within a business category (like car dealerships).
Therefore it will not penalize you for each inquiry within a short period of time. However, a high number of inquiries at a variety of business types (like car dealerships, electronic shops, furniture stores, and mortgage lenders), accompanied by other warning signs, will likely lead to a significant decline in credit score.
Also, inquiries for pre-approved credit offers or requests to see your own credit history are considered “soft inquiries” and will not negatively impact your score.
Once you know what’s a good credit score, the next step in becoming a first-time home buyer is finding out where you qualify within the market.
That’s where Solid Ground will help. Start your pre-approval application right now or book a free appointment with us if you have any questions (including what’s a good credit score). We’re here to help.