Every financial institution, whether a bank, microfinance company, or online lending platform, uses its own unique credit scoring system. This scoring system assesses a client's creditworthiness, and the score directly reflects the client's qualifications. Generally speaking, a higher score corresponds to a higher credit limit.
The United States has three major credit reporting agencies, commonly known as credit bureaus: Experian, Equifax, and TransUnion. Banks, debt collectors, and government agencies proactively submit personal credit-related information, such as credit card/loan account information, loan amounts, payment history, and outstanding balances, to these agencies. These agencies compile this information into a coherent credit report, which banks and lenders use to assess the borrower's creditworthiness and approve loans.
So, what is considered a high credit score in the United States?
Using FICO credit scores and grades as an example:
- < 580 = Poor: Credit scores are significantly below the average for US consumers, and applicants are typically unable to apply for credit cards or loans, or may be required to submit a deposit.
- 580 - 669 = Fair: Credit score is lower than the US average. You can apply for a loan, but the interest rate is usually higher.
- 670 - 739 = Good: Credit score is close to or slightly higher than the US average. Most lenders consider this person to have good credit.
- 740 - 799 = Very Good: Credit score is higher than the US average. Lenders consider this person to be a very reliable borrower.
- 800+ = Exceptional: Credit score is at the top of the list. Lenders consider this person to be an excellent borrower and can offer the best discounts and interest rates.
Banks have three main requirements for borrowers
proof of income, proof of funds, and proof of credit.
- Proof of income
The purpose of the proof of income is to prove the borrower's repayment ability and the legitimacy of the income.
(1) Bank monthly statement The bank will require the borrower to provide the bank statement for the last two months. The bank will better understand the borrower's financial situation from the income and expenditure items on the monthly statement.
(2) Two-year tax return The borrower needs to provide tax returns for the last two years. However, banks only recognize W2 and 1099 taxable income. Occasional income such as buying and selling stocks, buying and selling real estate, and winning the lottery are not included.
(3) Proof of the source of large funds The US government is extremely sensitive to money laundering. If a borrower shows a large amount of funds deposited in the monthly statements of the past two months, the legality must be proved. The so-called large amount of funds does not necessarily mean tens of thousands or hundreds of thousands of dollars. Money that exceeds the monthly income is considered a large amount of funds. If there are multiple small deposits, an explanation must be given. The source of large funds can be a gift, but it must be a gift from a relative. The source of large funds cannot be cash deposits, money orders, or company checks. If the company check is issued by a company you own, a CPA letter must be provided.
- Proof of funds
The borrower must prove that the money in his bank account is sufficient to pay the down payment and transfer taxes. He can show the bank the CDs, current deposits, etc. he has deposited in various banks.
- Credit Verification
Banks will use your Social Security number to pull up a credit report, which serves as a crucial factor in determining loan approval.
A credit score of 740 or above is considered excellent, making loan approval easier. Scores between 700 and 740 are considered good, and loan approval is generally not a problem. Scores between 660 and 700 are somewhat challenging. Scores below 660 will raise concerns among banks, and loans may not be approved.
Credit reports contain a wealth of information for banks, and are far more complex than simply looking at a credit score.
Credit reports can reveal debts, including credit card debt and car loans, which are used to calculate the Debit Tax (DTI). Negative records on a credit report, such as a missed payment four months ago, will raise red flags for banks, requiring the borrower to provide a reasonable explanation.