Want to Know Your Credit Score?
Comparing Credit Scores is Like Comparing Apples to Oranges
When seeking financing, most people ask themselves, “What’s my credit score?” and, “Will my score be high enough for me to qualify for the loan I want?” Keep in mind that credit scores differ depending on the type of financing you apply for, whether it be for a home or auto loan, credit card, or a business loan.
To help determine the credit scores needed for loan approval, ask yourself these 2 questions:
(1) IF I APPLY FOR FINANCING, WHICH CREDIT SCORES ARE NEEDED?
The minimum credit score to qualify for an auto loan varies greatly among lenders. With no government-backed financing programs for auto loans, each lender determines their own score requirements for loan approval. The credit score also affects the interest rate, length of term, and amount of down payment needed. Most banks and credit unions typically have minimum score requirements around 640. However, high risk lenders simply raise the interest rate (up to 30%, or more) to account for a very low credit score.
For auto loans, high-risk lenders simply raise the interest rate to account for a very low credit score.
There are many mortgage loan programs – each has different minimum credit scores to qualify. Most government-backed mortgage programs, such as FHA, VA, FNMA, etc., require scores of 600 or above. Loans from banks and credit unions that are held in their portfolio (portfolio loans) are not backed by the government, so the minimum score required to qualify is determined by each individual lender. Also consider that your income and amount of down payment may affect the minimum credit score a lender requires.
Credit scores needed for business loan approval are somewhat the same from bank to bank, although typically a score of 680+ is needed. Business financing is more strict because bank examiners regularly review the loans held by a bank to see that the bank is financially sound. Banks are discouraged from holding onto loans that are not performing or loans deemed to be high risk (based on the borrowers credit, profitability and reserves).
SBA loans are government-backed business loans, requiring at least a 720+ credit score. “Alternative lenders” are non-bank entities that offer financing to business owners with lower credit scores (usually a 620+). Interest rates usually begin around 10%, and can exceed 30%.
(2) WHICH CREDIT REPORTING AGENCIES ARE USED FOR LOAN APPROVAL?
Most banks and credit unions use a consumer loan scoring formula developed by the Fair Isaac Company (FICO), while most high risk lenders (auto finance companies) use formulas developed by other companies. Also, know that many lenders look at only one CRA score (i.e; TransUnion); although, some lenders will look at all three CRA scores and use the middle score.
Spouses: Banks, credit unions, and finance companies vary in whether a spouse is required to be on an auto loan. If so, then the lower score of the two spouses will be used to determine loan approval and the interest rate. The key thing to remember is that if your score is not high enough at one lender, check another. There’s a lot of variation in loan approval guidelines from bank to bank.
Scores from all three credit reporting agencies (CRAs) – TransUnion, Equifax, and Experian – are used when applying for a home loan, with the middle score being used to determine loan approval. FICO provides the formula for calculating mortgage scores. A key point to remember is that your FICO mortgage score will be the same no matter which mortgage lender pulls it.
Spouses: A spouse’s credit score is required if the spouse’s income is needed to qualify for the loan amount. However, some lenders require both spouses to be on the loan even if the spouse’s income is not needed to qualify for the loan amount. In this case, the lower of the two spouses’ middle scores is used to determine loan approval.
For mortgage loans, your FICO scores will be the same no matter which mortgage lender pulls it.
Most banks and credit unions will pull credit from only one CRA when determining your business loan approval. Usually this score is based on a FICO-based consumer or mortgage loan formula. Loans for small businesses (under $5 million in revenue) will almost always be underwritten based upon the creditworthiness of the owner(s), even though the business may have an established credit history. Spouses are usually only required to be on the loan if they are involved in the business, have ownership interest in the business, or if they have ownership in the collateral used for the loan.