4 reasons homeowners have the highest credit scores
Does owning a home increase your credit score?
When we analyzed the average credit score in Americait was immediately obvious that being a homeowner made a difference.
Of the consumers with the highest credit scores, in this case a VantageScore of over 750, 73% were homeowners and only 27% were renters. With lower VantageScore ranges, it was the opposite. Renters represented 84% of people with VantageScores between 300 and 550 and 72% of those with VantageScores between 551 and 600.
Is buying a home good for your credit on its own, or are there other factors involved? Here’s exactly why homeowners tend to have the highest credit scores.
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1. It’s hard to buy a house with bad credit
To get a mortgage, you must meet the lender’s minimum credit score requirements. On a conventional mortgage that you get from a bank, you will typically need a score of 620 or higher. Other types of mortgages may have lower minimums, some as low as 500.
Also, keep in mind that just because you hit a lender’s minimum doesn’t mean you will be approved. Mortgage lenders take a close look at your entire financial profile. Your credit rating is one of them, and the higher it is, the better your chances of qualifying for a mortgage.
Because it is difficult to get a mortgage with bad credit, adults with the lowest credit scores tend to stay renters.
2. People work on their credit before applying for a mortgage
It is common knowledge that a higher credit score will help you get a lower interest rate on a mortgage. And because even fractions of a percentage point can save you tens of thousands of dollars over the years, potential buyers typically work on their credit as much as possible before applying for a mortgage.
Tenants can certainly benefit from higher credit scores as well. Their rental requests are more likely to be approved and they may qualify for lower deposit amounts. But of the two groups, owners are more financially motivated to improve their credit scores.
3. The owners are older
Older people have higher mean scores on both the FICO® score and VantageScore systems. The average FICO® score of the youngest age group is 88 points lower than that of the oldest. With VantageScores, that’s an even bigger difference of 95 points.
There are several reasons for this, one of the most important being that the older you are, the more time you will have to build a positive credit and payment history.
As might be expected, homeownership rates are much higher among seniors. Although there are exceptions, young adults generally prefer the flexibility of renting and are not financially ready to buy a home. Once they have achieved higher incomes, saved more, and found a place they would like to settle, then they can start thinking about owning a home.
4. Homeowners have a more diverse credit mix
Credit mix is considered a very influential category in calculating your VantageScore, and it also represents 10% of your FICO® score. Your credit combination refers to the number of types of credit accounts you have, like credit card, auto loans and mortgages.
Homeowners, of course, have mortgages, unless they’ve paid them off or been able to buy a house without borrowing money. Renters obviously don’t, which means this is a scoring criterion where landlords have an advantage. A mortgage adds diversity to your credit mix, which can boost your credit rating.
You don’t have to buy a house to have good credit
For those of you who are renters, there is good news here. Only one part of home ownership is directly related to your credit score, and that is the fact that a mortgage is right for your credit mix.
While owning a home can be good for your credit, it is not a requirement. It is quite possible to achieve a high credit score as a tenant, and in fact, it is a smart goal to have before buying a home. You’ll have an easier time shopping for a mortgage and save money by qualifying for the best interest rates.