Get Your Credit Score Up As High As You Can

When lenders begin the process of determining whether or not they will give you a loan, they will first do an analysis of your credit score. Part of this analysis is to run a credit history report.

Even if you already own a home and think you no longer need to worry about your credit, there may come a time when you need to refinance your current loan for a better interest rate. You may want to take some cash out of your home for home improvements,  vacation or for whatever reason you might need additional money. In any event, the higher your credit score the better are your chances of obtaining a better loan.

A Quick Story Before I Begin

Let me start with a quick story about a recent conversation I had with a buyer who was looking to purchase a home. We were looking at her credit report and talking about how credit reports played into the type of loan that she would receive, interest rates, and so on. When she asked what she could do to get a better interest rate I said, ‘Up your Credit Score!’ She said, “Excuse me?” We got a good laugh out of that. However, seriously, that is exactly what she and you would need to do to get a better interest rate.

A Lot Depends on Your Credit Rating

Since so much depends on your credit rating, you need to get your credit score up as high as you possibly can and keep it there for as long as you can. The focus of this article is to share with you what a credit score is, the credit score range, and what are some of the things you can do to increase your credit rating to get a better loan for purchasing your home.

To understand what score you need to get a home loan, I’ll need to answer the following questions.

  • What is a credit score?
  • How Does a High Credit Score Help You?
  • How Does a Low Credit Score Hurt You?

What Is a Credit Score?

Credit companies use a complex mathematical formula to evaluate credit history data. The formula is so complicated that no human being could possibly do the computations themselves. No one knows exactly how the program works. In fact, it is a company secret. In any event, the formula is designed to present a report, which shows a snapshot of your credit risk. The report is based on consumer credit reports given by credit bureaus, lending institutions, and any other creditor where you have an obligation to pay. Your obligation could be a revolving debt, such as with credit cards, or an installment debt, such as with a car payment, furniture payment, a home loan, in fact, any sort of loan where you are contractually obligated to pay.

People to whom you have a contract to re-pay can report your payment history to reporting companies, and then, the reporting company enters the information into the mathematical equation. Your score is derived from the information received from your creditors.

Many Reporting Agencies

There are many of these credit-reporting companies, and depending on which company generates your credit report, your credit score report may vary. The most recognized credit reporting company is Equifax. In addition, if Equifax generates your credit report, then your credit score report is called your Beacon score.

The Highs and Lows of Credit Scores

How Does a High Credit Score Help You?

Having a high credit score can help you in the most significant ways. First, as you know, your credit score is a picture of your payment history, and if you have a high credit score you will be considered a low credit risk, consequently, you may be able to obtain faster loan approval. Lenders, seeing how well you have managed credit in the past, may be more likely to make more credit available to you. A high credit score speaks volumes for you. Lenders may have few, if any questions. Likely, they are able to make their decisions faster and inclined to reward you with favorable credit or interest rates and terms.

How Does a Low Credit Score Hurt You?

It is important to understand how having a low credit score can hurt you. First, you could be turned down for credit or loans. Since your credit score is considered a “picture” of your past payment habits, it is considered a good indicator of your future payment habits. A low credit score would indicate that the potential borrower might be having some financial difficulties, therefore, the borrower with a low credit score could be considered a higher risk if given more credit. Creditors look at it like this, “If you’re having trouble managing the credit you already have, then, how are you going to manage more credit on top of that which you are already having trouble managing?” The credit score is only an indicator – a tool that lenders use to begin the qualification process. When they see a low score they will, of course, want to know more about you. Therefore, lenders begin a probing process that may cause them to take a little longer to qualify you for a loan. In addition, if the lender does decide to give you a loan, then, because of the higher risk to the lender, you may pay higher fees and penalties and more than likely, higher interest rates on your loan.

What Is a Good Credit Score to Get a Home Loan?

Generally, lenders want to see scores in the 700 to 800 range, especially in times of economic hardship. Lenders know there is more of a risk in an economy when unemployment is high. They know there is a likelihood of the borrower being out of a job and forced into a position of becoming negligent with timely loan payments. So, in times of hardship, a credit score between 700 and 800 is considered good. When you have a good credit score, you can expect a better chance of receiving favorable interest rates and terms for your home loan.

Typically, if you have a credit score of 640 and below, you would have a difficult time obtaining a bank loan, and if you are approved for a loan, it would be what is called a non conforming loan. Near Prime Home Loans or Bad Credit Home Loans are generally offered with high interest rates and terms that are less favorable to the borrower.

In order to obtain lower interest rates, try to get and keep your credit score more in the 650 and above range. And, if you can, reach for the 700 and above range for the lowest interest rates and loan terms that are more beneficial to you.

Find Out About Your Credit Score

If you don’t already know what your credit score is, find out now – before you go to the lender. You can obtain your credit score from many sources on the internet but best to go directly to Equifax as this is the most common agency used by lenders in Australia. Some places are free and some charge a small fee. When you go to the web sites, you’ll know up front which are which.