By Jeannette Brown
If you’re in the market for a house, you might find the home-buying process complicated by one little number: your credit score. Whether you like it or not, the most important financial decisions of your life are affected by your credit rating, so it doesn’t hurt to be prepared well in advance. As home prices continue to rise, some sellers are re-entering the market, but if you don’t educate yourself about the importance of improving your credit score before you get too far along in the process, you could see your dream home slip out of your fingers.
Stricter standards are now being used when it comes to mortgage loans, so make improving your credit score one of the first items to check off on a to-do list as you begin the home-buying process.
So how exactly is your credit score determined? The number is created by credit bureaus so that lenders have an idea of whether or not you have responsibly managed your financial obligations. Your payment history, total amount owed, length of credit history, types of credit used, and new credit accounts are all important factors that impact your score. The higher your score, the less of a financial risk you pose to potential creditors. A FICO score – the most-common type of credit score lenders use, ranges between 350 and 850. A good score ranges from 680-729 while a great score is around 730-799. Above 800 is considered excellent.
When it comes to dealing with your finances, keep these tips in mind so that your credit score improves: • Bills, bills, bills: It goes without saying that you can’t have a good credit score unless you pay your bills on time. Make sure to do this consistently. Your credit score will suffer if you don’t make the monthly minimum payment on credit cards and loans. • On Time and Full: In addition, when you do pay your monthly balances, do your best to pay in full. If you can’t pay in full, try to pay more than just the established monthly minimum. • Your score will be negatively affected if you exceed your account limits, so keep a watchful eye on how much you spend. • If you apply for a lot of credit, your score also will suffer. Also, some experts caution that you should hold off on applying for any credit at least six months prior to applying for a mortgage. • Accuracy check: By checking your credit report regularly, you can ensure no mistakes will have a negative impact on future financial decisions. • Stay Active: Using your cards regularly will demonstrate that you can handle managing your credit responsibly. • You should avoid using the full amount of your available credit. It is best to keep your balances below 50 percent of the approved credit limit.
• Don’t apply or obtain new credit while in escrow. Your housing deal could fall through because Fannie Mae now requires lenders to run a new credit report before a loan is finalized. • Start early: If your credit/payment history is not sufficiently long and does not demonstrate a credible track history, then you may not be able to get a mortgage. Lenders want to see a history of managing credit obligations, so get started sooner than later. • Don’t be a victim: Have you been a victim of identity theft? If fraudulent credit accounts were opened in your name, you should not only notify the police but also credit bureaus and creditors immediately so that they can remove these fraudulent items off of your credit reports. • Diversity: Do you only have a department store credit card? In order to assess your full potential, lenders won’t respond well if you only have one type of credit history. It’s important to have diversity to show you can handle your finances responsibly, such as a car loan, a store card, and a major credit card.
If you want to obtain your credit score, there are three major credit bureaus: Experian, TransUnion, and Equifax that you can work with. You also can receive one free credit report per bureau (does not include your credit score, which is an additional cost) annually at http://annualcreditreport.com.