Did you know there is no standard definition for 'excellent credit'? You see, 'excellent credit' is a subjective term. Its definition varies from situation to situation, as well as from lender to lender. You may not think you have excellent credit, but even if your credit score is in the 600's, you may still be considered to have an excellent credit profile according to some lenders. There are several variables that contribute to your credit profile that may make lenders view it as 'excellent'.
Even without a standard definition that all lenders adhere to, one thing is true across the board: having an excellent credit profile can save you a lot of money and headache when applying for loans. With excellent credit, you are eligible to receive perks such as: no-documentation loans (saving you loads of time during the loan process), 0% interest rate loan promotions, $ 0 down payment loans, low fixed interest rates, and quick loan closings which allow you to get your loan funds fast.
Whether you think you have excellent credit, average credit, or bad credit, this is how you can analyze your overall credit profile in five steps:
- Obtain all three credit reports to acquire your current FICO score (also called credit score). You need to be aware of the credit history and credit score that is currently contained in each of the three credit bureaus: TransUnion, Equifax, and Experian. Although there is no standard definition for excellent credit, I can say that in my experience in the financial industry I have found a credit score of 680 or higher to be desirable. Of course the higher the score the better the credit profile, but I have definitely seen many cases where consumers with credit scores of 680, along with solid savings accounts and positive cash flow, have been able to take advantage of low loan rates and affordable payments because of their 'excellent credit' status.
- Locate any erroneous accounts or suspicious activity in your credit profile and correct immediately. Contact the credit bureaus in writing, and dispute any errors. By law, creditors must prove the accuracy of the information contained in your credit file within 30 days of a written dispute. If they cannot do so, they must remove the inaccurate data.
- Define the types of accounts you have in your profile. Lenders look at the kinds of loans you have accumulated over the years as well as your repayment history. For example, excellent credit profiles contain a variety of types of debt. A combination of fixed payment installment loans (such as mortgages, auto, or student loans) and revolving lines of credit (such as home equity loans or credit cards) is considered favorable. Having different loan types at the same time indicates to lenders that you can handle both fixed loan payments and variable loan payments simultaneously, while maintaining a positive monthly cash flow.
- Analyze your repayment history and available credit. What is your loan repayment pattern over the last 24 months and how much credit do you have available? Generally, individuals with excellent credit profiles have very few or no delinquent payments in their credit history over the course of several years. Delinquent payments are defined as being 30 days or more past due. Additionally, those with excellent credit are only using a percentage of their available credit. Keeping credit account balances low shows you are not dependent on the credit that you are allotted. As a rule of thumb, try not to exceed 40% of your available credit limit on revolving lines of credit in order to achieve an excellent credit profile.
- Calculate your debt to income ratio (also called DTI). Your debt to income ratio is simply your total monthly debt payments divided by your total net income. For example, your monthly debt payments total $ 1000 / month. After taxes and withholdings, you bring home $ 2500 / month. 1000/2500 = .40 or 40%. Your DTI would be 40%. Again, because lender standards vary, it is hard to say what an excellent credit DTI is, but in my experience I have found that individuals with excellent credit profiles to have a DTI of 40% or less. I have to say though, I have seen lots of cases where individuals with a DTI of 60%, along with a substantial savings account and a high FICO score, were considered an excellent credit candidate and were therefore eligible for money saving promotions reserved for those with excellent credit.
After completing these steps, you should have a general idea of how your credit profile will rank as you apply for a loan.