Credit Scores and How to Improve Them
Your credit score affects many things you do these days, but it is especially important in obtaining a home loan. The higher your score, the lower your payments will be. However, if your score is too low, your best bet is to rent for a while, take steps to improve your score, and then try again. Credit scores do change over time, and it is important to know that you can improve them.
Credit Score Tips
Know Your Score
Before applying for any loan, it is a good idea to know your score ahead of time. By doing this, you have the ability to talk about your position with some knowledge to the loan officer. When you have a higher score, you have more control and more bargaining power with your loan officer regarding fees, points and rates. The easiest way to get your credit score will cost around $15 but can save you money in the long run.
Check All Three Scores
You actually have three credit scores – one from each of the three major credit reporting agencies: Equifax, Experian and TransUnion. These agencies have different software for calculating your credit score, but the same company FICO developed the software for the three. It is probable that your score will vary with the three agencies, but probably not by much. But, just in case there is a reporting error with one of the agencies, it is good to check all three to make sure there are no discrepancies with your personal data.
Improving Your Credit Score
To improve your score, it helps to understand where your score actually comes from. FICO says one third of your score comes from your payment history. If you pay your bills on time, your score goes up. If you have late or missed payments your score goes down. Another third of your score is based on how much you owe. If your outstanding balance is too high, they decrease your score. And, the final third of your score is based on a combination of how long you’ve had various credit, any new credit you’re trying to obtain, and the types of credit that you have (credit cards, auto loans, home loans, etc.)
Be Cautious About Promotional Credit Cards
We’ve all been tempted by those promotional credit cards promising lower interest rates or points programs. While these may sound like a great idea, they actually hurt your credit score. Because your total score takes into consideration the age of your credit, as well as new applications for credit, these are a double-whammy. Not only does your score get lowered for the new credit application, your score is also lowered because now the credit line you just opened has very little history and is thereby a higher risk. So, word to the wise…stick with what you have, at least until after you have purchased your new home and the loan is fully funded.
Want to Learn More?
FICO provides some pretty good information as well. You can read more in the PDF here.