Before you begin searching for a new home, you will want to check your credit score. Your credit score could be the one thing holding you back from getting a mortgage at the best interest rate.
What is a credit score?
Your credit score is the main factor used by lenders in determining how reliable you are. It affects your eligibility for a loan as well as the interest rate you will have to pay. Your score is determined by information from your credit report, but the two are separate. The higher your score is, the lower the risk. It’s best to take the necessary steps to ensure your credit doesn’t become poor so that you’re able to get the best interest rate on your mortgage or home loan. You’ll also be more likely to get discounts on insurance with good credit.
The most common credit scoring method used by credit bureaus is FICO. FICO scores range from 300 to 850 and are based on these five factors: payment history (35%), credit utilization (30%), length of credit history (15%), types of credit in use (10%) and new credit (10%).
There are three major reporting agencies your lenders may report to, and they may not report to each one. Sometimes, lenders will only report to one or two, giving you a different score from each agency. The three major agencies are Experian, Equifax, and TransUnion. You can request your free credit report once a year from each agency at annualcreditreport.com. You can also request your free credit score monthly through credit.com.
If your credit score is already bad, one of the best ways to start bringing it up is by using a credit card. It is hard to build your credit without one. It would be wise, however, to keep these good credit habits in mind:
- Check your credit report annually – Make sure there are no errors or inconsistencies.
- Make your payments on-time every month for all accounts.
- Keep your credit card balance below 20% of your credit limit. (A lot of times the balance is reported mid-billing cycle, so maintaining a low balance keeps your credit utilization low.)
- Be sure to use your card consistently so the card isn’t closed and your credit utilization doesn’t go up.
- Keep your accounts open as long as you can to retain a good payment history and credit utilization.
- Do not open several accounts at once, or it could lower your average account age.
The best scores are given to people who make all of their payments on time, have little to no credit card debt, and have no bad collections activity or bankruptcy. The most points are lost when payments are missed, items are sent to collections, or bankruptcy is filed. Try to stick to the good credit habits so you’ll have an easier house hunting journey.