Your credit score can make or break your ability to get a loan. So what do lenders consider a ‘good credit score?’ It can vary by lender, but on average, most lenders consider scores over 700 good. Of course, the higher your credit score the better off you’ll be. While rare, some people do have credit scores over 800, which is considered excellent.
How Lenders Use Your Credit Score
Your credit score determines many things when it comes to the lending decision. First, they determine your risk level. Lenders look at your score and determine if you are a good risk. A low score will likely tell a lender that you are a high risk of default and that you pay your bills late. A good credit score will tell the opposite – lenders will think you are a good risk and will likely pay your bills on time.
Your credit score still has an effect on your loan even after a lender decides to lend to you. They will look at your score and determine your interest rate and the loan-to-value ratio. The riskier you are (the lower your score), the higher your interest rate, in most cases. The same is true for the down payment or LTV. The riskier you are, the more money the lender is going to require you to put down on the loan. The more of your own money that you have invested in the home, the more likely you are to make your payments.
What Makes up a Credit Score?
Knowing what your credit score is made up of can help you improve your score. A good credit score does mean the borrower did all of the following:
- Pay your bills on time
- Keep your balances to a minimum compared to the available balance
- Keep the average age of your accounts as old as possible
The largest factor in your credit score is your payment history. It makes up 35% of your credit score. If you pay bills late, it’s going to bring your score down. The other largest factor is your utilization rate. The amount of money you have outstanding compared to your available balances on your credit cards is important. Generally, having more than 30% of your balance outstanding can harm your credit score.
The Good Credit Score is Subjective
Now in all honesty, a good credit score is subjective based on the program you are using. For example, if you apply for an FHA loan, a 580 credit score is considered ‘good.’ But, if you were applying for a conventional loan with that credit score, they would not consider it good.
Each lender will view your credit score differently, even if you are applying for the same program with each lender. This is why it’s important to shop around and see what different lenders have to offer. Each lender has their own threshold for risk. Some lenders will allow low credit scores, while others only allow borrowers with a good credit score.
The best thing to do is keep working on your credit score. Pay your bills on time, don’t overextend yourself financially, and don’t open too many credit lines at once. Also, having a good mix of installment debt and revolving debt can help your score increase slightly. Whether a lender thinks you have a good credit score or not could be subjective, but if you do everything you can to keep it high, then you’ve done your job.