Your credit score is a big deal. It will determine whether or not you get approved for a mortgage and at what interest rate. The higher your score, the better chance you have of getting approved for a loan at a good price. However, if your score isn't where it needs to be, there are still steps that can be taken to improve your situation.
Elements of a credit score
A credit score is a number that represents your overall creditworthiness. It's calculated by combining information from your credit report, which includes details about your payment history, amounts owed, length of credit history and types of credit used.
Credit scores can range from 300 to 850. A higher score indicates that you're more likely to repay debts on time and in full; conversely, lower scores indicate greater risk for lenders.
Review and correct errors to ensure accuracy
Credit bureaus are not perfect and it's possible that something could be reported incorrectly. For example, a misspelled name or an account listed as open when it was actually closed could result in a lower score. It can also reveal bigger issues. Unfamiliar accounts, ones in the right name that you’re unaware of, can be a sign of identity theft. Investigate these aggressively and talk to an expert if you find yourself in this situation.
While credit bureaus are legally required to correct errors on their reports after being notified by consumers, it isn't an easy or fast process. You will want to get started right away.
Can't change history, but can improve the future
While it's true that you can't change your (accurate) credit history, you can improve it with a few tactics that are guaranteed to work in your favor:
- Make (at least!) minimum monthly payments every time
- Actively monitor your credit to make sure it remains accurate
- Pay down high interest lines of credit first
Review and evaluate each open line of credit
There is no “right” amount of credit. But there is credit that supports your goal of homeownership and credit that may detract from it. Carefully evaluate your open lines of credit and answer that question for each. Keep in mind that having too many open accounts (such as store cards) could actually hurt your chances of getting approved for loans or mortgages later down the road, because these types of accounts don't usually have any significant impact on credit scores.
Your most valuable accounts are those with a long history of good payment behavior. Even if they aren't currently being used, keep them as they show lenders that you're responsible with money over the long haul.
If you're considering closing an old account, make sure it has been paid off and settled in a timely manner. If not, the late fees and other penalties may cost you more than the value of keeping your credit score high.
On the flipside, if you're planning to apply for new lines of credit in the run up to your home purchase, talk to your loan officer first to see how it could impact your application. Credit inquiries are part of the application process and they will lower your score for a period.
You can take control of your credit score. Review and correct errors in your credit report and make a plan for how to maintain and improve your score going forward. You have been given a set of powerful financial tools to guide you along the way and your loan officer remains the best resource to discuss the details of your specific situation.