Homebuyers

Keeping Score Can Lead to Better Borrowing Rates

Once you decide homeownership is in your future, getting preapproved for a mortgage and engaging a real estate agent may be among your next steps. They shouldn’t be your first steps, however. Instead, start by taking a look at your credit score and, if necessary, getting it in shape to be reviewed.

6 Checkpoints to Establishing Good Credit

Checking your score is simple. You may already have free, monthly access to your FICO score if you have a credit card from a major finance company. You can also find it here, where you can order detailed reports from all three credit reporting agencies once a year, also for free. As you review your reports, here are seven key points you’ll want to check.

1. Verify your information and correct any errors. Closed accounts shouldn’t show up as open, and you should recognize all the accounts under your name. If you don’t recognize some of the entries, contact the company that granted the credit immediately along with the three credit bureaus (Experian, TransUnion, and Equifax).
2. Check your limits and balances. You may not want to rush to close inactive accounts right before borrowing. The reason is that 30 percent of your FICO score is related to the total amount of credit you have access to—the limits on each of your credit cards versus to the total amount of the balance you currently have outstanding on these cards. If you close unused accounts that will raise your utilization rate. It’s best to keep this utilization rate below 30 percent and preferably around 20 percent.

Jacob Lumby from Cash Cow Couple mentioned, “You want to avoid a high utilization ratio. For example, if you have a $5,000 credit limit, try to avoid charging more than $1,000 at a time (a 20 percent utilization ratio). Using more than 20 percent of your total credit is often frowned upon by the credit bureaus.”

3. Review your payment history. For each open account, the reports should show 12 straight months of on-time payments. Having a clean record when you apply carries a lot of weight in your score—payment history accounts for 35 percent of your FICO score. If you have an imperfect record, the sooner you start improving it, the better.
4. Keep inquiries to a minimum. Resist the urge to open a new store account just so you can save 20% on your current purchase. It can end up costing you on your mortgage. Credit reports record recent credit inquiries, and the more you’ve initiated, the more it appears as if you have some sort of financial issue. Since inquiries account for 10% of your FICO score, keep them to a minimum until after your mortgage closes.
5. Have credit. The length of your history as a borrower accounts for 15 percent of a FICO score. Being a cash-only person or only using a debit card may have helped you save up for your down payment, but not having a history that demonstrates responsible use of credit could cost you in terms of your FICO score.
6. Mix it up. The remaining ten percent of your FICO score is based on the type of credit you have used. It helps your credit score to have experience with a mix of personal loans, credit cards, store cards, and even student loans. This history helps demonstrate that you can handle your financial obligations as promised and on time.

While you can take actions on your own that will improve your credit score, if you want more personalized advice consider talking to your banker, a Loan Officer, or seek out help from a nonprofit counselor. Just know you shouldn’t need to pay anyone to do this for you.