Whether you are applying for a mortgage, car or personal loan, your lender will want to know one number: your credit score. This number is important for anyone seeking a loan.
There's a reason for this: your credit score tells lenders about your borrowing history. Your credit score shows whether you have a history of being a responsible borrower, one who typically never misses a payment, or whether you have a history of late or missed payments.
Before applying for any loan, it is important to understand the basics of your credit score and what it means.
SCORING
Most lenders today rely on the FICO credit-scoring system. This three-digit score ranges from a low of 300 to a high of 850. If you want to borrow money, and you want to borrow it at the lowest possible rate, you'll need a score closer to the higher end.
What does your FICO score include? According to myFICO.com, your credit score is based on your payment history, or how often you miss payments or pay your bills late. The amount of debt you owe, the length of your credit history and the types of credit that you use will also impact your credit score.
The most important of these factors is your payment history, which FICO says accounts for 35 percent of your credit score. Coming in a close second is the amount of debt you owe, which accounts for 30 percent of your score.
The lesson here? If you want an excellent credit score, you need to pay your bills on time, never miss a payment and pay down as much of your credit card debt as possible.
Of course, other factors will negatively impact your credit score. If you lose a home to foreclosure, you can expect your score to drop by 100 or more points. That foreclosure will remain on your credit report for seven years. If you declare bankruptcy, your score could again fall by 100 or more points. Depending on the type of bankruptcy that you file, this filing will remain on your credit report for seven to 10 years.
WHAT LENDERS WANT
Though it varies by lender, most lenders reserve their lowest interest rates for those borrowers whose FICO credit score is 740 or higher. That is considered an excellent score by most lenders.
If your credit score falls below 640, though, you might struggle to obtain a conventional mortgage loan. That is because lenders worry that borrowers with low scores are more likely to miss payments and default on their loans.
If you want to qualify for today's lowest interest rates, you'll need to bring an excellent credit score to the table. If you know you have a low score, it might make more sense to establish a history of paying your bills on time and cutting down on your credit card debt before you borrow again. You will benefit financially when you apply for that next mortgage, car or personal loan.
Are you hoping to boost your FICO score? Ameris Bank has what you need to know to get you moving in the right direction. There are also ways to keep track of your credit score, so you can watch your progress along the way.
Revised April 2023
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All loans and credit cards are subject to credit approval. Ameris Bank is not affiliated nor endorses the company featured in the article.
Ameris Bank is not affiliated nor endorses the company featured in the article.