Understanding and improving your credit score is important when purchasing a home. The first thing to note is that there is no one universal credit score. Next, it pays to learn how these numbers are determined. From there, you can focus on building up your scores to improve your ability to secure the home of your dreams.
Understanding how scores are determined
Many different agencies offer credit scores, most prominently the Fair Isaac Corporation, also known as FICO. The Consumer Financial Protection Bureau (CFPB, a government agency) pointed out that even when just considering FICO scores, there is still room for variation. Experian, Equifax and TransUnion are all major providers of credit reports, and depending on which of these companies produces the report that informs your credit score, the final number may differ somewhat.
Credit scores are used during the process of applying for a home loan. The number used to determine the terms of a loan may be slightly customized based on whether you're seeking a mortgage, an auto loan or another kind of credit. In advance of this moment of truth, you should take steps to ensure your credit score lives up to its full potential.
Making smart moves to boost your scores
While there's no way to calculate the exact credit score impact of common financial moves, there are patterns you should be aware of. The CFPB offered up the following suggestions to maximize your credit when it counts the most:
Limit your credit applications
Applying for many loans or lines of credit can lower your score. When you're getting ready for a large-scale loan such as a mortgage, it's important to limit your credit applications in the months leading up to the decision. The CFPB recommends only applying for credit when you truly need to, to keep your scores as high as possible.
Build a long credit history with no late payments
Timeliness in paying off your loans is one of the main variables that makes up a credit score. When you're slow to make a payment, it can have repercussions on your future ability to get ideal mortgage terms. The CFPB recommends using automatic payment systems to ensure you don't miss a payment due to the simplest and most avoidable reason: forgetting. The longer you keep paying back debts – making responsible payments in a timely manner – the more positive the impact on your score will be.
Avoid "maxing out" your credit
Even if your credit cards have high potential balances, that doesn't mean you should come close to those limits. Credit scores are lower for people who have a large amount of debt tied up in credit cards. The CFPB noted that 30 percent of your total credit is the maximum recommended amount for ideal results. Consolidating credit debt on one card may seem like a positive simplifying move, but if that pushes your available credit down, it may actually hurt your score.
Keeping an eye on credit reports
There is one other type of issue that may affect your credit score – a mistake on your credit report. Errors do sometimes occur, which is why the CFPB recommends checking through the reports that generate your scores. If there's a problem, you can dispute it. You are legally entitled to annually check your credit for free with each of the three national reporting agencies.
Equipped with these strategies, you're ready to maximize your potential when you apply for a loan.
Do you have more questions? Contact the loan officer who shared this blog post or send us a message.