Why You Need a 740 Credit Score for Your Auto and Mortgage Loan Applications

A few simple moves can boost your credit score.

Why You Need a 740 Credit Score

When it’s time to apply for a loan — whether it’s a car loan or a mortgage — your credit score is a major factor in ensuring you get low mortgage rates and auto loan rates.

The FICO score is the most commonly used credit score. Fair Isaac Corp. created this score, and 90 percent of top lenders use it, according to myFICO, the consumer division of FICO. The FICO score helps lenders gauge your risk profile as a potential borrower. If you need a loan, lenders will look at your FICO score, which will be somewhere in a range of 300 to 850. The FICO score gives lenders and loan officers a quick snapshot of the delinquency risk you pose.

If your score is on the high side, you are considered less of a risk. So, what’s a good credit score? According to credit reporting agency Experian, credit scores fall into the following categories:

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  • Exceptional: 800 and above
  • Very good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 579 and below

Good Credit Scores for Mortgages

Although every lender is different, most consider 740 the line between a good credit score and an excellent credit score. In fact, many lenders view a FICO score of 740 as being just as good as a score in the 800s.

Just 2 percent of borrowers with a credit score between 740 and 799 are likely to become seriously delinquent in their loans, according to Experian.

“The reason 740 is so important as a threshold is because generally speaking, the best published interest rates for mortgages [are] for people who have a middle numeric score of 740,” said John Ulzheimer, a credit expert who once worked for FICO. “So, it’s not just a good score to have because it’s a high number — it’s a good score to have because it will lead to the best interest rates in terms of the ones mortgage lenders have published.”

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Meanwhile, the credit score requirements for jumbo mortgage loans — which are installment loans that top $417,000, or $625,500 in higher-priced markets — might be lessening, according to an August 2015 report in the Wall Street Journal.

The Journal reported that J.P. Morgan was lowering the minimum FICO credit score from the standard 740 to 680 for jumbo loans.

Read: How to Negotiate a Lower Modified Mortgage Loan

Good Credit Scores for Auto Loans

In the world of auto lending, you can get a great rate on car loans if your credit score is in the mid 700s or higher. In fact, some people with high credit scores are able to find free money — that is, auto loans with no interest rate at all.

“Depending on how flexible you are, in terms of the type of car you consider, you might be able to borrow money for 36, 48 or 60 months with a 0 percent interest rate,” Ulzheimer said.

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He added that to get a 0 percent interest rate, you need to meet other deal metrics, such as having enough money for the down payment and meeting income requirements.

“So really, 740 puts you in the position for the best interest rates published for both mortgages and autos,” Ulzheimer said.

Read: 52 Cars You Can Own for Under $300 a Month

Falling Below a 740 Credit Score

Other lending options might be available for borrowers whose scores fall below the 740 mark. However, those options probably will not include the best interest rates or terms, Ulzheimer said.

He said lenders have to mitigate the potential risk of lending to people with lower scores. They do that by charging more for the loan.

“Someone who has a lower credit score, like 600 to 650, is considered a higher risk,” Ulzheimer said. “So the options they’re going to have will be very different and more limited, frankly, than someone who has scores in the mid to high 700s.”

Borrowers with credit scores under 600 might qualify for a subprime loan, which comes with a high interest rate — as much as 36 percent, the highest allowable by law.

Raising Your Credit Score 

To save money by getting the best mortgage rates or car loans, you should try to raise your credit score. Although it might take months or even years to improve your score, it’s worth the effort. Remember, a good score can save you thousands of dollars in the long run.

Here are a few things you can start doing today to enjoy a good credit score tomorrow.

Pay Bills and Credit Cards Promptly

Making payments on time is important, since payment history accounts for 35 percent of your FICO score.

Keep Credit Card Balances Low

The amount you owe accounts for another 30 percent of your FICO score. Keeping your credit card debt under 10 percent of your revolving credit balance will help move the credit score up.

Don’t Apply for Multiple Credit Cards or Loans

Applying for multiple accounts creates a trail on your credit report of hard inquiries that can negatively affect your score. If you have unused credit cards, keep them open, but do not use them. By having unused available credit, you positively affect the ratio of credit used to total available credit, which is one of the score metrics.

Related: 9 Ways to Improve Your Credit Score Today

About the Author

Natalie Campisi

Natalie Campisi is a Los Angeles-based writer and producer with more than 17 years of experience. She started her career as a journalist, reporting for dailies, the Associated Press and on Capitol Hill. She’s produced podcasts, commercials and online video content for everyone from tech startups to chocolatiers.

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