In the past few weeks I have met with several clients that thought their credit score was better than it was. In most cases they were still able to buy a new home, but the interest rate was higher than they wanted. In some cases we were able to quickly raise that score by paying down a credit card, but sometimes it takes more than that. One client was able to increase the score by over 30 points by simply paying down a credit card - that can make a difference in the interest rates.
Mortgage rates are best if your credit score is over 740. As your score drops below that, the cost increases quickly - it may be .25% or higher if the score is below 700. With the foreclosures over the past few years, your credit score has become more important than it used to be.
In order to keep your score as high as possible, there are a few tips that you want to remember.
- Make your payments on time. This is one of the most important things to remember. One late payment especially on a mortgage or installment loan will lower your score quickly. Set up automatic payments if necessary to make sure your bills are paid on time.
- Do not max out your credit cards. Keep your credit card balances low - preferably about 30% of the available credit. The ratio of credit card debt to the available limit is called credit utilization. The more you use your credit cards and the higher the balance, the lower your credit score. This is one area that can be fixed easily and can quickly improve your credit score - pay down your credit cards to less than 30% of the available credit and your score will improve quickly.
- Use one card. Do not close and open new credit cards frequently. Lenders like to see a long history with your credit cards. If you close a card that had a long history and open a new card, you just lost that history. If you don't want to use a card, keep it at home or somewhere safe so you won't be tempted, but do not close the account.
When you are looking at credit scores, remember that what you see online with some of the different credit score programs are not the same as your mortgage score. I have had clients use a credit program to keep an eye on their credit score and they will tell me their score is over 700. When we pull their mortgage credit report, the score is usually significantly less than that. Mortgage credit reports have different credit criteria and it will make a difference in your score.
