Are you giving your credit score the attention it deserves? If you’re thinking about buying a home or refinancing your current one soon, you need to give your credit score some TLC. Don’t neglect your credit rating just because you’ve successfully purchased a home.
Unfortunately, that sneaky little number follows you around, and it may come back to bite you if you don’t take good care of it. In today’s article, I’ll explain why credit is ALWAYS important, why you should know your exact credit score, and give you some advice on maintaining good credit.
How Is Your Credit Score Determined?
Your FICO credit score is the one way a lender can tell if you are a responsible borrower and if they should take a risk and lend you money. Your credit history— if you’ve paid your bills on time or “maxed out” your credit cards— will show up on your credit report. Lenders will analyze your report and determine a loan’s conditions and interest rate based on how “good” your credit score is.
Remember, a credit score has nothing to do with your income or investments. Your credit score is based on how you’ve handled your credit card payments and other loan payments, like your car, student loan, or current mortgage.
It also considers if you’ve declared bankruptcy, have a tax lien, or a collection agency is seeking you.
Each of the three major credit bureaus (Experian, TransUnion, and Equifax) collect your credit information and calculate your score. Keep in mind your credit score could vary slightly from each bureau.
Why is it Important to Know Your Exact Credit Score?
The higher your credit score, the lower the interest rate on your mortgage. It’s that simple. And with a lower interest rate, you’ll save more money over the course of your loan.
Don’t assume you will get the advertised interest rate you see online or elsewhere. Even though you may have “good” credit, if it’s not what lenders consider to be the highest score (740 or above), you will not get the low advertised rate.
However, if you’re a credit rockstar with a score over 740, you’ll get the best rates and have many more loan options. Pretty much anything over 700 is considered really good, and most lenders will want to work with you. You’re what lenders consider “low risk.”
A score of 680 is still considered good, but your interest rate will be considerably higher. As your score gets lower, you’re considered riskier, and you’ll be offered higher interest rates and fewer loan options.
When you start getting below 660, lenders may deny your loan application completely, or you’ll have access to fewer options.
If you’re refinancing, most banks expect a FICO score of at least 620 and will also want to see that you have a good debt-to-income ratio.
How homeownership Effects Your Credit Score
When you first applied for a mortgage loan, your application for new credit affected the “inquiries” section of your credit report. Inquiries account for 10% of your credit score, so your credit was likely affected (temporarily).
After you get your loan approved and buy a home, your mortgage loan will also affect your score. If you pay on time, this will only increase your score. A “healthy” credit report should have a variety of accounts and loans. Maintaining multiple credit cards and different kinds of loans demonstrate that you have the ability to manage many different types of debt. This credit mix makes up an additional 10% of your FICO score.
Start Monitoring Your Credit Score Today
Not knowing your credit score could lead to an unpleasant surprise when you apply for a loan.
You should start to monitor your credit score from all three bureaus about 3-6 months BEFORE you even start looking for a home or plan to refinance. The earlier you start, the more time you can repair any credit issues you may have.
It’s easier now than it’s ever been to track your credit score. You can sign up online for myfico.com or other credit monitoring companies. Myfico.com alerts you to any changes to your credit reports via email or text. It’s a great way to get an overview of your credit report and to find out which factors are affecting a low score.
You’re also entitled to one free copy of your credit report from each of the three credit bureaus every 12 months. You can get it through AnnualCreditReport.com. Most experts say to stagger these reports so that you get one every four months.
How to Raise Your Credit Score
If you need to impress a lender in the coming months, here’s a rundown of how you can improve your credit report and increase your score:
- Determine why your score is low, then create a plan to rectify the issue.
- Make payments on time EVERY TIME. It doesn’t matter if it’s a few dollars or a few thousand dollars. A late payment will hurt your score. This factor makes up 35% of your FICO score.
- Increase your score by having a higher credit limit on your cards but maintain a low balance. It shows you’re credit-worthy. The credit bureaus want to see that you have available credit you aren’t using. Even though it sounds counter-productive, call all of your credit card companies to see if they will increase your limit … but don’t use them!
- Never make major purchases during the time of your loan process. It’ll look like you are racking up new debt, and that could lower your score.
- Think twice before you cancel a credit card. You can increase your score by continuing to build on years of positive account history.
- Keep credit card balances low. It’s best to keep your debt-to-credit ratio at 30% or lower. That means don’t spend your credit limit each month, even if you pay it off! This utilization rate is about 30% of your score.
- Negotiate with creditors if you’ve been a good customer in the past. You can ask for a “goodwill adjustment” and have them remove that blunder from your report.
- Look out for errors or anything suspicious on your credit reports that could affect your score. You can dispute this information. It’s a good idea to monitor your report regularly. People make mistakes!
- Pay off your parking tickets and even library fines. You don’t want these “trivial” fines to be turned over to a collections agency. These little slip-ups could do significant damage to your score.
Now that you know how your credit score is determined, how to increase it, and why it’s important to know your exact credit score, you’ll be on the way to getting the best interest rates and loan programs available. Your credit is always with you and constantly in flux. So even if you don’t need a loan right now, you should still keep an eye on it. For more tips on securing loans and other real estate topics, check out my blog! And as always, reach out to me anytime for advice from your friendly neighborhood realtor.
I'm Lauren Haug! I'm a teacher-turned-real estate agent, and I teach people how to build wealth through real estate in Northern Colorado.
schedule your free consultation