If you’re in the market for a new home, it’s important to know your credit score. A good credit score can lead to a better interest rate on your mortgage, while a lower score might present some extra challenges. Are you feeling the need to improve your score? Here are a few things you can do before you start house-hunting.
- Check your credit. Start by requesting your credit reports from the three credit reporting agencies: Equifax- equifax.com – 1-800-685-1111. Experian- www.experian.com – 1-888-EXPERIAN (397-3742). TransUnion- www.transunion.com- 1-800-916-8800. You’re allowed one fee copy every year. Requesting one report from each agency every four months can show you how your credit changes over the year. If you’re short on time, request all three at once.
- Dispute any errors. Next, look for errors, signs of fraud or outdated information. Are the accounts familiar? Are all balances accurate? Is a closed account listed as open? If you spot an error you’ll need to submit your dispute in writing to both the reporting agency and the company that provided the information.
- Stop credit activity. Until you apply for a mortgage, it may be a good idea to cease most credit-related activity. That means you’ll want to skip any large purchases, avoid applying for any new accounts, and try not to switch jobs or make any other major life changes.
- Pay down balances. One of the most important factors in determining your credit score is the amount you owe compared to the amount of credit you have. Ideally you don’t want to use more than 30 percent of your available credit. If you can, work to pay down balances if you’re using more than this.
Good credit can take time to build, but regularly reviewing your information and working to rectify past errors will put you in the best possible position when it comes to getting an optimal interest rate on your mortgage.
What factors affect my credit score?
- Payment History
This one is relatively simple. If you make your credit card and loan payments on time, this tends to help your credit score. If you have late payments, your credit score will be lower. History and trends matter. A late payment will always lower your score, but if you have a history of on-time payments, it may not affect your score as much as it would for someone who is consistently late. On the other hand, it may take longer for someone who is typically late to build up their score with on-time payments. Late payments, collections and charge-offs are also lumped into this category. Payment history accounts for 35% of the formula; your credit utilization refers to how much credit you’re using.
- Credit Utilization
Representing 30% of the formula, your credit utilization refers to how much credit you’re using compared to your monthly limits. For example, if you have a credit card balance of $250 and your credit limit is $1,000, you’re utilizing 25% of your available credit.
- Length of Credit History
The credit bureaus also consider the length of your credit history, which makes up 15% of your total score. This is measured from the time you open up a credit card or close on a car loan or mortgage. The idea here is that the longer you have your accounts open, the more you can prove or demonstrate that you’ve been responsible with credit. You don’t have to have four credit cards, plus a car loan and a student loan in order to get a mortgage, bust a long history of sound financial responsibility can only help.
- Credit Inquiries
Credit inquiries make up 10% of your score. If you’re applying for a mortgage, its not a good idea to apply for three new credit cards and a car loan at the same time. This is because credit companies want to know that you’re not overextending yourself with credit. For this reason, each hard inquiry made at the time of application my temporarily knock down your score a little bit.
- Credit Mix
Your mix of credit accounts for the final 10% of the credit score formula. For creditors, this is all about knowing that you can handle various different types of credit, including both revolving accounts like credit cards and installment loans like a mortgage, student or personal loans.