Aug 6, 2020 4 min read

I had a client the other day ask how high his credit score should be for him to apply for a mortgage. I immediately realized I did not know enough about credit scores and decided to do some research.

Credit scores range from 300 to 850. Those sets of three digits might seem arbitrary, but they matter – a lot. A good credit score is key to qualifying for the best credit cards, mortgages and competitive loan rates.

When you apply for credit, the lender will review your credit report to determine your eligibility based on this information. The report includes that three-digit number known as your credit score. That magic number tells lenders your potential credit risk and ability to repay loans. Credit scores consider various factors, such as payment history and length of credit history from your current and past credit accounts.

There are two main credit scoring systems: FICO and VantageScore. FICO scores are more valuable, as lenders pull your FICO score in more than 90% of U.S. lending decisions.

A FICO score can fall into the following ranges: Very poor: 300 to 579; fair: 580 to 669; good: 670 to 739; very good: 740 to 799; and excellent: 800 to 850.

Credit scores are calculated differently depending on the credit scoring model. Here are the key factors FICO uses:

• Payment history (35%), whether you’ve paid past credit accounts on time;
• Amounts owed (30%), the total amount of credit and loans you’re using, compared with your total credit limit, also known as your utilization rate;
• Length of credit history (15%), the length of time you’ve had credit;
• New credit (10%), how often you apply for and open new accounts;
• Credit mix (10%), the variety of credit products you have, including credit cards, installment loans, finance company accounts, mortgage loans and so on.

Only about 1.6% of Americans have a perfect 850, according to FICO’s most recent statistics. While it might be exciting for some to aim to join the 850 club, it comes with no additional benefits that you likely won’t already get with a 760 score. The best published interest rates for auto loans are 720-plus, and 760-plus for mortgages.

The median credit score of successful mortgage applicants last year was 759, or “very good” on the FICO scale. Only 10% of mortgage borrowers had credit scores under 647, according to the Federal Reserve.

While it’s not the norm, borrowers with scores as low as 620 are getting approved for new mortgages, even amid the current economic downturn. Yet, having a healthy credit score still matters when applying for a mortgage, as banks tighten their lending standards. Applying for a home loan with a lower credit score may not prevent you from getting a loan, but it could expose you to higher interest rates.

In my research, I found some important steps one should take before applying for a home loan. Start by visiting AnnualCreditReport.com for your free weekly credit report from each of the three main credit bureaus: Experian, Equifax and TransUnion.

Once you know where your credit stands and you’ve checked your credit score, do the following to improve your credit score: Pay all your current bills on time; pay off as much debt as possible; and keep your credit card balances low. Don’t apply for new credit because a hard inquiry will ding your credit score a few points temporarily. Don’t close any current open credit lines.

I grew up in a household where borrowing money was frowned on. All loans where to be paid off as soon as you could. I also grew up in a time when there were no credit scores.

Today, managing your credit score is an important part of sound financial planning.

Bob Hollick is a State Farm Insurance agent based in Washington. His column now will appear every other Thursday in the Observer- Reporter.

To submit columns on financial planning, investing or business-related matters, email Rick Shrum at rshrum@observer-reporter.com.