Improve Your Chances for a High Credit Score
Posted March 15, 2006

Dear Joan:

 I hear a lot about the importance of good credit scores when applying for a mortgage. What is considered a good score? What will it do for me and what can I do to make sure mine is high? I’m concerned because I have friends who say they got a lower score than they expected.

 Signed,

Honey, I shrank the credit!

 Dear I shrank the credit:

 A good credit score is one of the most important things in getting a mortgage today. It’s right up there with being employed, having enough cash for your down payment and closing costs and agreeing with your significant other that the new home they want is just perfect.

 Credit scores range from the 400’s into the 800’s. There are many loan programs available and lenders each have different cutoff points depending on their risk tolerance. In general, a score of 720 or higher will get you the most favorable rate and many times will be enough for the lender to waive some of the documentation they normally require.

 If your score is above 680 you should be able to get what’s called an “A” paper loan at a good rate. In addition to traditional “A” paper loans many people who have credit scores in the lower 600’s can get a mortgage, but their loans will probably be more expensive and fall into a category called sub-prime (B or C paper). So, if you were a B or C student in school, it’s time to do a little credit homework and bring up that grade.

 Credit reports come from three nationwide consumer-reporting agencies—or CRA’s—Equifax, Experian and TransUnion. Fair, Isaac and Company is the group that designed the FICO model that is at the heart of these three agencies. When a credit report is generated, it generally consists of three credit scores, one from each of the CRA’s. The one that is used by your lender to determine the mortgage rate, or approval for the loan, is the number that is in the middle of these three scores.

 The largest factor that makes up the FICO score is payment history. It accounts for 35% of the credit score. This includes a history of payments for mortgages, credit cards, retail accounts, finance company accounts and installment loans. This area takes into consideration any late payments made and the length of time between their due dates and payment received. The lesson here is to make your payments on time and not let the mail sit around unopened.

 Amounts owed makes up the second most heavily weighted part of the FICO credit model (30%). This includes the number of accounts with balances and how much is owed on these specific accounts. This category also includes the proportion of credit lines used to the total credit limits available. In other words, don’t spend to the max on your credit cards.

 The other areas that contribute to your score are length of credit history (15%), types of credit (10%) and new credit (10%). The longer you have had credit, the better. It is also important to use your credit. Every few months you can make a purchase with a credit card just to keep it active and show that you know how to manage your credit. This is good to know if you need a reason to take advantage of a really good sale on shoes.

 Some of the things you can do to improve your score include:

1.    Pay all bills on time, even if you just pay the minimum required.

2.    Use your credit cards even if you have cash. Charge and pay on time.

3.    When closing credit cards, keep the ones you’ve had the longest.

4.    Check your credit once a year and clean up any errors.

5.    Keep balances at 30% to 50% of your available credit.

6.    Let a couple of months pass between getting new credit.

 Finally, if you have your bills organized and your statements in files that are within reach, you will be doing yourself a great service. Being organized—in addition to helping you make payments on time—can also help you in the event there is an error on your credit report This is important because an uncorrected error can have a significant impact on your credit status.

 With a few simple steps and a little restraint, you can improve your chances for a high credit score and save a considerable amount of money over the life of your mortgage. Other than dinner at a great restaurant with your sweetheart, what could be better than that?