There are those who strive to get their credit scores as high as possible. Even way beyond the minimum credit score for many home loan programs. Some programs that ask for a minimum score of say 720 or 740 are above the minimum scores for other programs such as 680 or even 620. But for some raising credit scores is a constant theme, even when someone isn’t applying for any credit account at all. It’s true that different programs have different minimum credit score requirements. For instance, the FHA loan program asks for a minimum credit score of 580 but can go as low as 500 with a down payment of 10 percent or more. Most conventional loans ask for a minimum score of 620.
Credit scores today are commonly referred to as FICO scores, which is the acronym for the Fair Isaac Corporation which developed the original algorithm that calculates the three digit number. FICO scores can range from as low as 300 to as high as 850. I’ve never witnessed either score on a credit report, the score is always an in-between number. When a mortgage application is received and an authorization form allowing me to pull a credit report, I also request credit scores. There will be three different scores, one from each credit repository. There are three such repositories, Equifax, Experian and TransUnion and all three use the exact same algorithm. Of these three scores, the highest and lowest are ignored, using the middle score for qualifying.
This number reviews five basic categories of a borrower’s credit history. 35 percent of the total number represents payment history. Payment history is noted on the credit report as a payment being more than 30, 60 and 90 days past due. If there are no such payments listed, the payments were made on time or at minimum not past 30 days. 30 percent is attributed to the amounts owed on credit accounts compared to credit limits.
The ideal balance-to-limit is approximately one-third of the credit line. If the credit line is $10,000, then the balance should be somewhere near $3,300. With such a balance, credit scores will slowly rise over time. Some consumers might be surprised at this, thinking that a zero balance is better than carrying one. True, a high balance account will hurt scores but not owing any money on a credit account doesn’t improve scores. If you think about it, how can someone evaluate a payment history if there are no payments being made, right?
Okay, how does someone achieve the magical 850 score? I don’t think it’s achievable. It’s possible I guess but during all my years being in this business, while I’ve seen excellent scores approaching 800 and the low-800s, I’ve never reviewed a credit report that reflected such pristine credit where the score hits 850.
One final note about credit scores and it involves having more than one person on a loan application. For example, a couple are buying a home together and each has an individual score. Remember that it’s the middle score that gets counted but with two people, lenders will use the lowest middle score. For someone that is cosigning on a loan application, the lowest middle score of all applicants will be used. Cosigning can help with income issues but can’t resolved credit concerns. Someone might have a credit score of 810 but if someone else has a credit score of say 650, it’s the 650 score that will be used for qualifying purposes.