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The credit scores of Homeowners and renters
Buying a home and having a good credit score are two things that go hand in hand. It will be very hard to get qualified for a mortgage if you do not have a good credit score.
There are many factors that go into determining your credit score, but the most important thing is getting your number up. Since it is so important for a home owner to have a good credit score, a research company thought it would be interesting to compare the credit scores of owners with the scores of renters.
An August 28, 2006 article by Kenneth R. Harney of Realty Times, “Homeowners vs. renters: who scores better?” looks into this interesting comparison.
People may be quick to think that homeowners may have lower scores because they have so many more financial obligations than renters.
There is the mortgage, homeowner’s insurance and costly repairs, just to name a few of the many expenses associated with owning a home. But this is not the case at all.
“A new study, based on a nationally-representative sample of three million individual credit files, concludes that it's not even close: Homeowners may lug around substantially bigger household debt loads, but their average credit scores are 55 points higher than non-owners.”
“The study was conducted by Experian Consumer Direct, a subsidiary of Experian, Inc., one of the three national credit bureaus, as part of its ‘national score index’ research. The scores computed were not Fair Isaac (FICO) scores, but Experian's own proprietary version that uses similar weighting factors such as outstanding credit debt balances, historical repayment performances, utilization of available credit, and length and type of credit. Experian's scoring system runs from 330 to 830, with higher scores indicative of lower risk of default.”
This just goes to show how important a credit score is in obtaining a home and mortgage. According to the study, homeowners had an average credit score of 713, and renters scored an average of 658. The study also found that home owners with the most debt, meaning a second mortgage or home equity line of credit, had the highest scores. These people averaged a whopping 739.
“The average revolving and consumer debt of renters in the sample was $4,565, compared with an average of $24,565 for homeowners with one mortgage and $42,511 for owners with seconds or equity credit lines on top of their first. ‘Consumers with mortgages are doing a great job managing their credit and those with second mortgages are doing even better,’ said Ty Taylor, president of Experian Consumer Direct.”
Many people are left wondering why, in general, home owners have a higher credit score than renters. While there is no concrete answer to this question, there may be a few explanations that make sense.
“Why the sharp differences in scores and management of credit between people who own a home and those who don't? The Experian study did not attempt to answer that question. But one theory is that people who buy homes generally have greater financial resources, higher levels of financial sophistication, and are more confident and adept at handling debts than people who do not take on the burdens of property ownership. Academic and federal government studies have shown conclusively that home owners have significantly higher net household wealth than renters -- in part because the real property they control grows in value over time.”