The Role Your Credit Plays in Getting a Home Loan

Moshe Farber
24, Nov 2021

Maintaining a good credit score is crucial, not only for securing a loan but it’s an important part of responsible financial planning. Your credit score directly affects your chances of getting a loan and might even help you get better interest rates. Let’s discuss the meaning of credit, some ways to enhance your credit score, and the role good credit plays in getting you approved for a loan. 

Credit refers to your capacity to borrow money from an individual, company, bank, or organization and it’s based on a legal understanding of the probability that you will pay back a loan. Your creditors, such as banks, lenders, and credit card companies, can extend you a line of credit depending upon your credit score and the risk that they take on by approving a loan for you. 

The simplest way to understand the purpose of a credit score is to think of it as a report card. It allows the lender to have an overview of your financial health and responsibility. A credit score is based on your credit history and current debt. It considers all your past credit lines, loans, and liabilities. It factors in the amount of debt you’ve taken on in the past and the time you took to pay it off. Credit bureaus track and compile individuals’ credit histories to calculate their credit scores and form a report. 

How is your credit score calculated?

Numerous factors contribute to determining your overall credit score. Your credit score can fall anywhere between 300 to 850 points. 

The FICO score is a model that is used to calculate the credit score of an individual. Given below are the components that play a role in calculating your FICO credit score:

  1. 35% of the score depends on your payment history. 
  2. 30% of your credit score depends on the amount of your debt. 
  3. 15% of your overall credit score relies on the duration for which you have used your credit.
  4. 10% of the credit score depends on the new credit you access. 
  5. 10% of the score is based on your overall mix of credit such as your student loans, car loans, and revolving debts like credit cards. 

When you apply for a loan, the first thing your lender checks is your credit score. It establishes the level of risk they’ll take on by lending you capital. Depending upon your credit score, they can assess the probability that you will be able to pay off your loan responsibly. Maintaining a good credit score unlocks doors. 

Here are 4 benefits of maintaining a good credit score:

  1. Lower Interest Rates and Better Offers – Banks might offer you lower interest rates for your loans and credit cards when you have a good credit score. You might also be eligible to get added benefits like higher loan amounts or even discounts on processing fees. 
  2. Greater Chance of Approval – Good credit improves your chances of getting approved for a loan. Loan or credit card applicants with a good credit score are seen to be more reliable and lower-risk. As a result, their chances of getting loan and credit card approvals are very high compared to those with an average or low credit score. 
  3. Rewards and Other Perks – A good credit score helps you get your hands on the best credit available in the market. You can get numerous rewards like lower interest rates, cashback offers, coupon codes, travel points, and more exciting benefits. 
  4. Pre-approved Loans – Borrowers who maintain a good credit score are likely to be pre-approved for loan offers. When a bank has customers with a good credit report, they add them to the list of pre-approved borrowers, and the process of applying for a loan becomes significantly easier for them. 

If you maintain an excellent credit score, meaning a score above 750, you can explore more loan and payment term options. 

How to Improve your Credit Score?

Now that you are aware of the advantages of having a good credit score, you should familiarize yourself with ways that you can maintain and improve it. It is important to note that you cannot improve your credit score overnight. It is a gradual process. 

5 Ways to Maintain a Good Credit Score:

If you are planning to apply for a loan, you must start with keeping the following factors in mind: 

  1. Be Prompt with your Credit Card Payments – If you have a credit card and are not accustomed to paying off your statement balance each month, or at least making your minimum monthly payment, that will decrease your credit score. Consider setting up autopay for your credit card so that your full statement balance is paid each month and you can avoid paying the high interest rates that credit cards are known for. Just make sure that there is enough money in your bank account each month to clear your balance without causing any financial strain. Most credit cards will offer the option to turn on monthly alerts before an autopay payment is disbursed.
  2. Maintain a Low Revolving Credit Utilization Ratio – Your Revolving Credit Utilisation ratio refers to the ratio between your total credit and your debt. Maintain the ratio at 30% or less of your available credit. 
  3. Do Not Close your Accounts Temporarily – You might think that closing your credit card accounts temporarily will raise your credit score. But this could have the opposite effect, since having less credit available can increase your credit utilization ratio. 
  4. Try Not to Open New Credit Accounts Simultaneously – If you apply for many credit accounts or credit cards within a short period of time, it can significantly reduce your FICO score by about 10%.  It can also lower your chances for approval for new credit cards.
  5. Consult a Financial Planner – Speak with a Mortgage Advisor or a professional Credit Counsellor. Getting guidance from experts can help you improve your credit report. You might even get to know about valuable offers, loan structures, and options. Seasoned financial experts can expedite the process of improving and maintaining a good credit score for you. 

Interested in improving your credit score and maximizing your chances of securing a home loan?

Reach out to an Astar loan officer to discuss your personal credit and loan options today! Email info@astarteam.com or call 888-ASTAR-11 (888-278-2711) 

A good credit score helps you earn the trust of lenders, which is crucial to meeting your financial, personal, and professional goals. Building a good credit score is a long-term endeavor and an important part of personal finance. By understanding the role credit plays in getting a loan and discovering ways to improve or maintain your credit score, you can maximize your chances of securing a loan for your dream home!

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