Your Credit Score: How to Manage It (Or Repair If Necessary)

A smiling young couple sits across the desk from a lender while discussing credit scores.

Your credit score is an important piece of the home financing process, so it’s important to know what yours is and how it can impact your monthly mortgage payments.

As lenders have tightened up on requirements for qualifying for a home loan, it’s imperative that prospective homebuyers understand their credit history before beginning their home search.

Your credit score, in particular, is incredibly important to the homebuying process.

But why? What is this nebulous number and why is it so important?

What Is a Credit Score?

“A credit score is a numerical value that attempts to assess your credit worthiness,” says Todd Huettner, a mortgage broker with 20 years’ experience and president of Huettner Capital, LLC in Denver, Colo. He highlighted several items used in calculating a credit score:

• How long you have had credit accounts;
• How many accounts you have or have had;
• Utilization rate or how much of your credit limit you are using;
• Any recent changes, such as opening a new account;
• Payment history; and
• Derogatory items, such as collections or judgments.

As the score is derived from your credit history, it’s a good idea to know what is in your credit report in case of incorrect information or potential fraudulent activity. You can obtain a free credit report at AnnualCreditReport.com. By law, you can request one free report per year from each of the three primary consumer credit reporting companies: Equifax, TransUnion and Experian. However, the free credit report generally does not include a credit score.

You can also sign up for credit monitoring services to track any activity in your report. “While credit monitoring is a good tool to find problems, prevent surprises and track your progress, you really want to have a lender pull a full report and pre-qualify you for a loan,” Huettner says.

But not all credit scores are created equally. For buying a house, it’s important to work with an experienced home lender to know your exact credit score for a house purchase. “When you buy a car or apply for a card at the mall, they use a different scoring system that just tells them what grade you meet for them,” Huettner says. “Even when you sign up for credit monitoring, the scores can be very different or on a different scale than what home lenders use.”

What Makes a Good Credit Score?

What constitutes a “good” score depends on what kind of loan you want. For most home loans, you want to see at least a 620 in a full lender credit report, according to Huettner. “But you really want a 680 or better to have more options and to avoid a lot of added loan costs. Anything above a 740 is great for most loan programs.”

How Do I Manage My Credit Score?

As soon as you think about buying a home, talk with an experienced home lender to pull your credit score so you know where you stand and what may need fixing. Huettner recommends focusing on these three areas to keep your credit score in good shape:

1) Revolving debt, such as credit cards, can help improve your score or tank it if you make a mistake. The key is to keep your utilization rate, or the amount you owe as a percentage of your credit limits, below 30 percent.

2) Don’t use store cards, period. While they can save you a few dollars on an initial purchase, they are also the single biggest reason for missed payments — and a lower credit score.

3) Pay your bills on time, every time. Just one delinquent payment per year can hurt your score.

How Do I Repair My Credit Score?

“Draw a map,” Huettner says. “With bad credit, you have to know where you are and where you need to go.” He cautioned against using a credit repair company and instead to take the time to find an experienced lender for advice. “I have yet to meet someone who felt they got what they paid for when they used a credit repair company.”

If late payments or collections are the primary issues, only time — and a perfect payment history — can help. Removing any errors in your credit report can help your score in the more immediate term.

Ultimately, “you must demonstrate how to use credit wisely,” he says.

Judy L. Marchman is a freelance writer and editor, with 20 years of magazine and book publishing experience. She covers a variety of subjects, including home-related topics. Her work has appeared in Kentucky Monthly, Keeneland Magazine and the Official Kentucky Derby Souvenir Magazine, among other publications.

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