Typically, it is beneficial to put as much money down as possible when buying a home or car. However, it is unusual to be able to pay for large purchases like these out-of-pocket. To be able to afford a large purchase like a car or home, a mortgage or car loan is required to cover the remaining balance after a down payment is made. In order to get a loan, a good credit score can go a long way.

What Determines a Credit Score?

There are many aspects that go into determining a credit score. Factors like timely payments and the length of credit history for a borrower will contribute to their credit score. A timely payment history makes up roughly 35 percent of an overall score, and the amount of debts owed makes up another 30 percent. The length of credit history a borrower has accounts for 15 percent, and the mix of the number of accounts and overall credit inquiries a borrower has make up the remaining balance.

Each category holds a different bearing on the overall score, depending on a borrower's credit history. Things like cancelling credit accounts with remaining balances have implications on an individual's available credit. A reduction in the amount of available credit a borrower has can result in changes to their credit score, as it adjusts the length of a borrower's credit history and increases the debt/credit ratio seen by scorers.

What Does a Credit Score Mean?

A credit score is a numerical indication of a person's perceived ability to handle debt. FICO scoring models range from 300 to 850, with 850 being the best possible score one can obtain. The FICO score is used by 90 percent of all financial institutions in the US, according to myFICO.com. Most lenders will offer the best terms to those who have scores of 700 or higher. Minimum credit score requirements for loans vary but typically borrowers will need a credit score of 620 to qualify for a conventional mortgage loan.

How Does Credit Determine the Ability to Buy a House or Car?

A low credit score can determine what types of loans are available to a borrower intending to make a large purchase. Credit scores under 600 may require subprime loans. These loans typically come with high interest rates and large down payments or may require a cosigner. In most cases, subprime borrowers will find their mortgage options limited.

Individuals who have good credit are generally eligible for larger loan amounts. This may make it easier to purchase a new car and/or have the flexibility look for homes in more expensive neighborhoods. Good credit may also allow a borrower to make a smaller down payment and receive a lower interest rate, which could translate to lower monthly payments on the loan.

To obtain a good credit score, borrowers should make payments on time and keep credit card usage to a minimum to reduce debt. Establishing a budget prior to shopping for a loan and having reasonable expectations for what can be afforded will make the borrowing process easier.

The content on this site is for informational purposes only and is not professional financial advice. MaxLend does not assume responsibility for advice given. All advice should be weighed against your own abilities and circumstances and applied accordingly. It is up to the reader to determine if advice is safe and suitable for their own situation.

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