It is critical to understand credit score requirements when considering a loan for any purpose in 2022. Nearly all loan types carry some credit score requirement including a mortgage, home equity line of credit (HELOC), personal loan, and others. Here's how your credit score impacts your successful application for a loan, and your interest rate.
Credit Score 101
Your credit carries a lot of weight during any loan application process. What makes up your credit score and how is the calculation done? Finally, how can you improve it in the short and long term?
A credit score is a numerical representation of your financial history. The credit score calculation will take into account loan balances, payment history, the number of loan applications you have had over the past few years, and more.
Lenders rely on your credit score to determine creditworthiness. If you have a poor credit score, you may receive a higher interest late on your loan, since you present an increase in risk to the lender. A low credit score could also result in your loan application being denied entirely.
Credit Score Ranges
Your credit score ranges from 300 to 850. It is possible to research your own credit score before filling out a loan application. Set up accounts with the three credit bureaus or use credit card companies to gain access to your credit score, all for free. In 2021, the average credit score calculated with VantageScore model was 698. Generally, you see a credit score range grouping as follows:
- Excellent - 800 and above
- Very Good - 740 to 799
- Good - 670 to 739
- Fair - 580 to 669
- Poor - 579 and below
Know the Credit Reporting Agencies
To keep things in balance for you as a consumer, there are three credit reporting agencies in the United States. These include Equifax, Experian, as well as TransUnion. Each of these agencies calculates your credit score similarly, but minor variables will differentiate each credit score calculated. These variables include:
- Credit Scoring Model - Typically lenders will use the FICO or VantageScore models. These two models evaluate the same main factors of your credit history, but formulas and weighting will be a bit different.
- The Version of the Scoring Rubric - Credit scores are commonly calculated with the FICO Score 8 and VantageScore 3.0 scoring rubrics.
- Information at the Credit Bureau - All three credit bureaus may not have the same financial history. Lenders are not required to report everything on your finances to all three institutions. Instead, they need to report to one and it is critical the bureaus share information. If this does not happen, information could be missing that impacts your credit score calculation.
- Errors on Credit Report - Believe it or not, over 30% of Americans find errors on their credit report. One of the bureaus could have you with a late payment on a credit card that is inaccurate. A dispute process allows you to correct inaccuracies.
Factors With a Big Impact on Credit Score
Three major factors come into play when talking about your credit score, including:
- Payment History - What is your payment history? For the last several years, have you made a payment on time for all your accounts? One or two late payments on a credit card, mortgage, or any other type of loan could negatively impact your credit score.
- Credit Utilization - Your credit utilization rate is a calculation with the basis of the outstanding balance of your credit cards against how much your available line of credit is.
- Credit History and Mix - What is the age of your credit cards? Beyond just age, a mix of auto loans, credit cards, a mortgage loan can all help show positive financial history. If your entire credit history consists of credit cards, that could negatively impact your score.
- Credit Behavior - Credit scores factor in your credit behavior. E.g. in the last 12 months, what are your number of credit card or mortgage applications? A company like Figure will only do a “soft” pull on your credit, so it does not impact your credit score. Once you do a full application submission, though, this will be logged in your historical credit report.
What Score Do You Need for a HELOC?
A HELOC allows you the ability to set up a credit line to borrow funds against the equity in your home. Your credit score will impact your ability to qualify for a HELOC. A credit score of at least 700 will give you the best chance at qualifying for a top-tier HELOC. If you have a credit score in the “Good” range, you may also still qualify, but with higher interest rates.
What Score Do You Need for a Mortgage?
Every lender is different when it comes to credit score requirements for any loan offer, including a mortgage. There are also several different types of mortgages, including conventional, FHA, VA, etc. When you look across the spectrum of lenders, though, and what they require for credit score, you usually see a minimum credit score for a conventional mortgage loan to be around 620.
What Score Do You Need for a Personal Loan?
Borrowers who have “Good” credit with the basis of the criteria above are most likely to qualify for a personal loan. There will be lenders who specialize in personal loans for individuals with credit scores even below 600. It will all depend on the lender, but as long as you are in the “Good” range your odds of success are high.
Figure Pay Credit for All Program
What do you do if you have a poor credit score or no credit at all? The Figure Pay Credit for All program may be for you. With this program, you set up a digital wallet with Figure Pay. This allows you to use the buy now, pay later feature to make a purchase and then pay for it over time. This helps with the budgeting of large purchases, and also gives borrowers the ability to build up their credit score in the process. Every time, you set up a Figure Pay Credit Loan, you are establishing a four-month one-time installment loan you are paying back. Each one you complete reports to the credit bureaus as loans paid in full and helps to rebuild credit.
How Figure Works
Figure came to the market with the mission to transform the financial services industry through blockchain. Figure's blockchain tech brings speed, efficiency, and savings to consumers as well as financial institutions.
Start Your Road to Great Credit
You should set out on the road to a great credit score with the help of Figure. Their Figure Pay Credit for All program allows you to build up your credit score incrementally and can make the purchases you need in convenient ways. If you already have quality credit, you can rely on their other offerings including mortgage, personal loan, and HELOC application processes.
These articles and resources are not intended to be financial advice. They are for educational purposes only, and financial decisions should be based on specific financial needs, goals and risk appetite.