Home Buying and Your Credit Score
What you need to know, now
If we had to guess, thinking about your credit score isn't part of your everyday life. You probably don't drive to work wondering if it's risen lately, browse the grocery aisles inspired to run a credit check, or contemplate FICO 740 every time you take your dog on a walk.
But then you decide to buy a house.
And all of a sudden, your credit score is important, and it's all you can think about. (I'll take two green peppers…and a FICO 740, please.)
Between gathering real estate agent recommendations and reading our Movement blog to learn about all things homeownership, you wonder; how exactly is my credit score calculated, anyway?
Presenting…the Big Three of Credit Reporting
The three largest national consumer credit reporting agencies are Equifax, TransUnion and Experian. Your loan underwriter will most likely use one or more of these companies to gather your credit history and scoring. Each agency uses a certain formula to calculate where you're at on a scale of about 300 – 850.
Your credit score takes into account:
- How many lines of credit you have open, including mortgage loans, auto loans, credit cards and store credit. Even if you're not using an account, just having it is enough to be included in your overall score.
- How much credit you're using in your open accounts.
- Late bill payments or delinquent accounts.
- Previous loans or debts.
- Any prior strikes against a loan or debt you had, such as foreclosure, short sale, lien, collection or bankruptcy.
Essentially, a credit report is an estimate of how good you are with any credit you've already used. Lenders, banks and credit agencies want to know if you'll use their loan wisely, if you're good at paying off a debt or if you tend to miss payments. The reasons why aren't usually taken into account, though our loan officers and underwriters will give our customers a chance to explain most credit strikes. They just want to know if you're worth the investment, and if you're a risk they're willing to take or not.
So while your credit score doesn't need to consume you before you decide to buy a home, it does need to be on the radar. A regular credit check can help you keep your score high, give you time to fix any errors, or make up for a season of negative hits before you need your score to get a loan. Because neglecting it could force you to put off the dream house, and we definitely don't want that to happen.
Which leads us to these smart credit habits
- Make your payments on time. Late payments can lower your credit, although if you have to make a late payment, make it on a credit card rather than a loan, as credit cards carry less weight.
- Keep credit debt low. A good rule of thumb is to keep your debt lower than 30% of your credit limit. So if your credit limit is $1,000, keep your debt under $300.
- Avoid opening too many accounts at one time. You may have heard that opening multiple accounts can help you build credit. And while that's partially true, it can also lower the average account age, which makes up part of your credit score. So try to only open one or two at a time, not more than that.
- Keep accounts open for as long as possible. As long as you pay off your balance each month or make at least the minimum payment until it's paid off, there's no reason to close your credit cards, unless your card provider charges a yearly fee. Again, since the account age factors into your credit score, it's actually beneficial to keep cards open longer. Instead, make small purchases on your cards and pay them off in full at the end of the month.
Check credit reports annually for errors and discrepancies. As we mentioned earlier, black marks on your credit report can seriously hurt your score. Be sure to monitor your annual report for any mistakes, and take care to correct them. You'll need to prove your side, so be sure to do your research and have all documents and paperwork ready to disprove a mistake.