Reader Question: “I have read that I need an excellent credit score to get the lowest rates on a mortgage loan. I’m planning to buy a house later this year [in 2013], and I’m trying to lay the groundwork now to get the best possible rate. What is considered to be an excellent credit score these days?”
Editor’s Note: This article has been updated for 2013. Most of the credit-score standards and requirements from 2012 have carried over into 2013. We have adjusted this article as needed to reflect any changes. Updated: 1/3/13
That’s a good question, and you are wise to start doing your homework in advance like this. It’s true, you will need to have an excellent credit score if you want to qualify for the best rates on a home loan. It’s also true that the difference between “good” and “excellent” has shifted in recent years.
During the housing boom, you could probably get a great interest rate with a score of 720 or higher. I’m talking about your FICO credit score in particular, which has a range of 300 – 850. You could qualify for a mortgage loan with a score below 720 — you just wouldn’t get the best rate in that range. Flash forward to the present. What is an excellent credit score in 2012? Most of the lenders and creditors I’ve spoken to set the bar at 740 and up (on the FICO scale). This is probably what it would take to get the best rates and terms these days.
What is an Excellent Credit Score for Mortgages?
In February 2012, we conducted a survey of mortgage lenders in the United States. We asked them what it would take to qualify for their lowest interest rates on a home loan. They all said borrowers would need excellent credit scores. No surprises there. So we asked them for a specific number. Twenty-seven lenders responded to this follow-up question, and this is what they said:
Based on our survey, an excellent credit score is 740 or higher on the FICO scoring range. If you fall into this range, you should have no trouble getting approved for a home loan. You will also qualify for a better interest rate than someone with a lower score. You might even get the best rate the lender has to offer. When you spread this out over time, the savings can be significant. You could end up paying thousands of dollars less in total interest, over the life of the loan. Not to mention the smaller monthly payments.
While the survey was conducted in 2012, these general rules will apply in 2013 as well.
(Side note: There is another scoring model called VantageScore, and it ranges from 501 – 990. But in this article, I’m referring to your FICO score in particular, since it is the one used by most banks and lenders.)
So that’s how I would define an excellent credit score in 2013, from a mortgage-lending standpoint. I would say anything north of 740 on the FICO range would make you a well-qualified borrower. But what about other types of financing? Let’s shift gears for a moment to talk about car loans.
What About Car Loans?
Do auto-financing companies have the same standards as mortgage companies? And if not, what is considered an excellent credit score when shopping for a car loan these days? Generally speaking, the qualifications for getting an auto loan are less rigid. So the definition of excellent credit can be shifted downward a few points. For instance, take a look at the table below.
This data was provided by Informa Research Services, a market research company. It shows what kind of score you might need to get the best interest rate and APR on a car loan. (The APR is the interest plus other fees the lender may charge on the loan.) It’s important to note that these numbers are based on actual rates and trends from the lending industry — there is nothing hypothetical about it. So what is an excellent credit score for an auto buyer? Based on this data, the bar seems to be set at 720 or above on the FICO range.
You Can Save on Credit Cards Too
People with excellent credit scores generally pay a lot less interest on their credit cards, too. It’s an added incentive for boosting your FICO numbers. Card issuers typically reserve their best rates for people who fall into this category.
It’s all about risk. Your credit score is basically an indicator of risk. It is a direct reflection of how you have borrowed money in the past. If you always pay your bills on time, you’ll end up with a higher score (compared to someone who is frequently late or delinquent on their payments). This means you’re a lower risk to creditors, including the credit card companies. So they are more inclined to give you a lower rate. A high-risk borrower, on the other hand, will be charged a higher interest rate — and maybe some additional fees as well.
In 2011, the average interest rate for existing credit cards that carried a balance was around 15% (source: Federal Reserve report on consumer debt). But those cardholders with excellent credit scores typically had a lower rate, sometimes significantly lower. And the reverse is true is for those with lower FICO numbers. They paid more in total interest charges.
How to Reach the Excellent Range
The next question most people ask is, how do I get there? If my score is currently below the 720 – 740 range, how can I boost it enough to qualify for the lowest rates? In other words, how do I achieve an excellent credit score by current lending standards?
The good news is that there is no mystery about how to raise your credit score. I have written volumes about the subject here on the Home Buying Institute website, so I don’t plan to repeat it all here. But I will talk about the two most important factors that will influence your FICO score.
You’ve probably heard this before, but here it goes again. The best things you can do to raise and maintain your credit score are to (A) pay all of your bills on time and (B) reduce your debt load. The first item is pretty straightforward. A history of paying all of your bills on time, such as your credit cards and car payments, can do wonders for your credit score. The second factor needs a little explanation…
Your credit “utilization ratio” is another key factor that determines your FICO score. This is the percentage of your available credit that you are currently using. It is a composite number that takes all of your accounts into consideration. For example, if you have two credit cards with a combined balance of $5,000, and the total limit across those two cards is $10,000, then you are using half of your available limit. Stated as a percentage, your credit utilization ratio is 50%.
Why is this important to lenders and creditors? And why is it used in the FICO scoring model? To answer this question, I turn to Rod Griffin, director of public education at Experian (one of the three credit bureaus): “The utilization rate is an important indicator of lending risk,” said Mr. Griffin. “A person who is charging to the limit on their credit cards is far more likely to suddenly have repayment problems than a person who uses their credit cards sparingly.”
The lower your ratio, the better your FICO score will be … with all other things being equal. If you want to reach the excellent credit score range someday, you should probably aim for a utilization rate of 20% or less. How you do this? You pay down your card-related debt, for starters. If you needed more incentive to reduce your debt, there it is!
This article answers the question: What is considered an excellent credit score in 2013? This information has been provided for educational purposes only and does not constitute financial advice.