Mortgage approvals hinge on your FICO score, as does your final mortgage pricing.
If you’re shopping for a home in Indiana, or contemplating a refinance, be aware of how everyday credit behaviors can affect your FICO. Most lenders have carved-in-stone rules about handing out the best terms, and those rules place a major emphasis on your credit score. If their best rates are offered to borrowers with a score of 700 or higher and yours is a 698, those two points could cost you thousands of dollars. So keep in mind that even small events can make a big impact.
Here are some common-sense steps to help improve your credit score.
First, keep a “cushion” on your credit cards.
30 percent of your credit score is linked to “Amount Owed” and a big part of Amount Owed is a raw calculation of (1) What you owe in dollar terms, against (2) How much credit you have at your disposal. The credit bureaus want to see at least 70% of your credit “available”.
If you can keep your cards at least 70% available, your credit scores should improve.
For example, if all of your credit cards give you access to a combined $50,000 and you are using $10,000 of that available credit, you have 80% of your credit available to you and this is “good”. Raise your balances to $30,000 and this is “bad”.
Second, don’t make major purchases on credit prior to making a mortgage application. This includes opening a store charge card to save 10 percent or more on a washer/dryer set, for example; or for any other appliance or furniture piece.
The reasons why are two-fold. One, store charge cards are often opened with a limit matching your initial charge, rendering them 100% utilized. This is bad for a FICO, as discussed above. And, two, opening a new charge cards has a negative FICO impact anyway. We have seen closings fall through because buyers starting racking up credit card debt on appliances just before they own the home.
Charge cards are associated with high default rates.
Third, make all of your monthly payments on time — even the ones in dispute. This may seem like common sense, but its sometimes difficult to principal over practicality. You may not want to pay that $120 wireless phone bill, for example; the one that has 11 calls to Tahiti and 2 calls to 1-900-HOT-DATE, but remember that Payment History accounts for 35% of your credit score. Even one late payment — or payment in collection — and your credit score can drop. A lot. You can always continue disputing the bill and seek a credit back to your account.
It’s often less expensive to pay a bill in dispute than to be relegated to a higher mortgage rate. The payment is dispute is remedied today. The payment on that mortgage rate lasts for 30 years.
If you’re unsure where you stand on your credit rating, be sure to visit AnnualCreditReport.com. This is the ONLY authorized source for the free annual credit report that’s yours by law. The Fair Credit Reporting Act guarantees you access to your credit report for free from each of the three nationwide credit reporting companies — Experian, Equifax, and TransUnion — every 12 months. The Federal Trade Commission has received complaints from consumers who thought they were ordering their free annual credit report, and yet couldn’t get it without paying fees or buying other services. TV ads, email offers, or online search results may tout “free” credit reports, but there is only one authorized source for a truly free credit report.
As always, let us know what you think below, or drop us a line if you have questions regarding your credit.