Pursuing a higher credit score is worth the effort. It affects the interest rate for your mortgage, autos loans, credit cards, and insurance (home, auto, etc.). Whether or not you are considering a new mortgage, staying vigilant about your credit is the best way to save money. Additionally, it is the best way to deter identity theft.
If you are considering purchasing or refinancing your home in the future, one of the first steps is reviewing your credit to ensure it is mortgage ready in advance of contacting a lender. The credit tips in this blog will also help you increase your credit scores and reduce your overall housing expense.
How Credit Scores affect your Mortgage Application
The higher your credit scores, the greater the selection of available loan programs and down payment options, as well as lower interest rates and decreased private mortgage insurance (PMI) premiums. It is important to note that credit score minimums can vary with each type of mortgage. FHA, VA, and USDA-RD loans typically allow greater flexibility with credit scores. Conventional loans are slightly more conservative and your credit scores will have a greater impact on your interest rate. Your Mortgage Lender will review your information and credit scores received from the three credit bureaus: Equifax, Experian, and TransUnion. Your middle credit score (not the highest or lowest) is selected as the best representation of your credit and is used as your primary score for the application. If you are applying for a mortgage along with another person, the lower of the two borrowers’ “middle” credit scores will be used for your loan application.
Review your Credit regularly without lowering your Credit Scores
Reviewing your own credit report does not count as a credit inquiry and does not lower your credit scores. Reviewing your credit regularly at AnnualCreditReport.com is always a good idea. This government-sponsored website allows you to retrieve your credit reports from each credit bureau: Experian, TransUnion, and Equifax. Print or save the reports and thoroughly review all the data listed on your reports for accuracy. The creditors typically update the data every 30 days, so your balances shown on the report may not have been updated for the current month. Do not purchase the credit scores offered on this site though, as they are consumer scores and are not representative of the scores given to creditors.
If you request credit from a lender (auto loan, credit card, mortgage, etc.) the lender retrieves your credit report, and this counts as a credit inquiry. If several credit inquiries occur from a specific type of lender such as mortgage, auto finance, or credit card companies within a 30-day period it will only count as one inquiry. Each inquiry will lower your score by approximately 2-5 points.
Maintaining the highest Credit Scores
The highest credit scores with each credit bureau is 850. Our goal as consumers is to try to maintain the highest scores to reduce costs of interest and insurance. These tips will have the greatest impact in improving your credit scores and ultimately reduce your costs.
- Continue to pay all your bills on time including your rent, mortgage, auto payments, credit cards, utilities, etc.
- Reduce the balances on revolving credit accounts (credit cards and lines of credit) to approximately 30% of the charge limit for each account.
- Existing credit card accounts or lines of credit without balances do not reduce your credit scores. However, closing these accounts will affect your overall credit history and will lower your scores.
- Do not open any new credit or charge accounts of any kind. The credit inquiry will likely lower your scores slightly. Also opening a new credit account will reduce your scores 30-50 points immediately.
- Bring any active past-due accounts to current status immediately. The longer the period of elapsed time since the due date, the greater the negative impact on your credit scores.
- If collection accounts are listed on your report, contact the collection agency (not the creditor), and negotiate payment of the account. If the account is a medical collection, request a deletion letter from the collection agency when the account is paid off.
- If you discover inaccurate derogatory information listed on your credit report, contact the creditor listed and request deletion of the information. This process may take 30-90 days for the credit bureau to update your credit report. Any disputes remaining on your credit reports at the time of your mortgage application will be removed for the lender to obtain an accurate credit score.
Credit scores change constantly, and any of the items discussed above will likely change your scores. The changes in your credit scores may show up quickly, or it could require a 6-12 month history to positively adjust your credit scores.
Your online Credit Scores are likely different than scores seen by your Mortgage Lender
The credit reports/scores you see online are likely utilizing a consumer score model and not a model used by Mortgage Lenders. Each type of lender is assigned a credit score model based on the type of credit risk for that lender. For instance, mortgages are typically 30-year loans, auto loans are typically 5-7 year loans, and credit cards offer short term financing. Each creditor may receive slightly different credit scores depending on the creditor’s type of lending and the scoring model used. Additionally, each of your creditors may only report your information to one or two of the credit reporting agencies, resulting in one of your credit scores being higher or lower than the remaining two credit scores.
The credit bureaus are the sources of your credit scores, and their websites provide consumers with accurate, detailed information about credit scores. The three websites are: experian.com, equifax.com or transunion.com. If you need to resolve past credit issues, there are credit repair companies available for a fee, but you can update your credit reports yourself for free. Follow the guidelines above and resolve any disputes with creditors immediately before it affects your scores.
You have the power to determine your Credit Scores and create savings!