What are credit scores?

Would-be borrowers across America who apply for home loans to buy real estate have one thing in common: their credit score. Some borrowers have excellent credit while others earn only average or even poor credit. Why does it matter, and what does that mean for you?

Quite simply, lenders use credit scores as the leading indicator of investment risk. Scores range from 350 to 850; high scores are better and begin at approximately 700. If you have a high score then, chances are, you always pay your bills on time, you don’t max out your credit cards and you maintain long-term banking relationships with home lenders, auto lenders and credit card lenders.

High scores mean that you’re pretty likely to pay a loan back at the agreed-upon terms. Banks love to loan money to applicants like you because – to them – you represent a safe investment. Banks reward high-credit-scoring applicants with the lowest interest rates. Sometimes, in the case of mortgages, banks may permit smaller down payments – leaving more cash in pocket.

On the other hand, lower-scoring borrowers may have to put more money down. They usually pay higher interest rates, too. If your credit score ranks below 700 and you see lower than low advertised rates, don’t get too excited. Lenders reserve those rates for the most creditworthy applicants.

To improve your score – which can take several months or even years if your credit is especially poor – always pay your bills on time. Reduce your outstanding balances, and don’t open new accounts or close old ones. For first time homebuyers, maintain an auto loan and a credit card if possible.

Finally, build a savings account in case of emergency, because while banks will lend to those with less-than-spotless records, they save the best terms for those in excellent financial shape.