It’s not a secret that—especially in today’s tighter lending climate—you need a pretty darned good credit score. Especially if you want a good mortgage rate quote. Credit scores are a very large factor in the type of mortgage rate quote you receive. But how do you get and maintain a good credit score? It can sometimes get a little complicated. We’re here to help you in understanding your credit scores.
The past – Understanding Credit Scores and your mortgage rate quote.
It used to be that mortgage lenders would get your credit report and look for some pretty specific things. First, they’d want to know how long you’d had a credit history. Second, they’d evaluate the type of credit you’d had (installment or revolving). Third, they’d check out the balances of those accounts. And last, but certainly not least, they’d want to know how you’d been making your payments.
If you’d had credit for several years, including at least one installment loan, paid down the original balance and never missed a payment, you were considered to have an “A” credit rating. This would get you the best mortgage rate quote. If you had few (or no) credit accounts, or had some minor delinquencies in the past, you were a solid “B”. And you were a “C” (or worse) if you had major delinquencies, maxed out credit lines or accounts that had been written off due to non-payment.
Today – your FICO score and your mortgage rate quote.
Then, about 20 years ago, lenders began to focus more and more on a mathematical calculation developed by the Fair Isaac Corporation—now commonly known as a FICO score. This score took all of the information that those lenders had been looking at and put it into a three-digit number. The higher the number, the better the credit risk. The better the credit risk, the better your mortgage rate quote.
According to myFICO.com, two-thirds of your credit score is based on two things: how much you owe and how well you’ve made your payments. The remaining third of your score is based on the length of your credit history, the types of credit you’ve been using, and how much credit you’ve recently acquired.
The most important things you can do to get a positive credit profile and maintain it include:
• Pay your bills on time
• If you have credit cards, keep the balances low and pay them off. Moving balances around, according to myFICO.com, can potentially lower your score
• Only open new accounts if you need them, and manage the accounts you have responsibly
One thing I recommend to anyone considering a home purchase is that, even before beginning the application process, you get a copy of your credit report from the three main credit reporting agencies: TransUnion, Experian and Equifax. It’s free, and doesn’t affect your credit score to do so. But be cautious where you get that report. Many sites state that it’s “free”, but in reality require you to pay a monthly “monitoring” fee. They advertise the report as being free and then charge you upwards of $15 per month to keep an eye on your credit for you. If you choose not utilize their monitoring services then they don’t give you your credit report. The only real “free” and safe (meaning it won’t show on your credit report that your report was pulled) place to check your credit report is on the government sponsored site www.annualcreditreport.com. By law, you are entitled to receive a copy of your credit report (not your score…just the report) from each bureau for free one time each year.
When you receive your report, review it closely to ensure that there aren’t any mistakes. And if there are inaccuracies, start the correction process as outlined by the credit reporting agency. Remember, the higher your credit score, the lower your mortgage rate quote!
Questions or comments about building and maintaining a great credit score? Post them below.