Buying a home is a big financial decision. When you begin this process, one of the first things a licensed loan officer will do is perform a credit check. An excellent credit score gives you advantages, but a low credit score won’t disqualify you. For example, an FHA loan requires a 580 credit score; however, a credit score of 620 or above is ideal and will allow you to utilize additional programs like down payment assistance and receive lower interest rates. Let’s look at how you can check your credit score, raise it, and how it's calculated. 

How to Check your Credit

If you want to find out your credit score, you can always check with a lender. However, if you’re not ready to contact a lender yet, Brett Collin from Barrett Financial Group recommends visiting a site like freecreditreport.com. This will give you quick insights into your credit score, areas you can improve, and even access to dispute errors on your report.  

How is a credit score calculated?

One of the most important things to understand about credit scores is how scores are calculated. While the process can be full of numbers and complex calculations, here are the basics: 

• Payment History - This accounts for 35% of your overall credit score. Your history shows you’ve made payments on all your credit lines over time. Payments made 30 days or more after your due date are typically reported to credit bureaus and will lower your score.  

• Credit Usage - This may also be referred to as utilization and makes up 30% of your credit score. Credit usage is the proportion of credit you’ve used compared to how much you’re approved to borrow. For example, if you have a credit limit of $10,000 and your balance is $4,500, then your usage/utilization is 45%. Experts recommend aiming for a utilization ratio of 30%.

• Length of Credit History - This indicates how long your credit lines have been active and represents 15% of your overall score. A longer history is preferable to a shorter history because it demonstrates that you’re a trustworthy borrower. Longer credit histories will lead to a higher credit score. 

• Credit Mix - This refers to the diversity in your credit portfolio and accounts for 10% of your score. Examples of different accounts you can have include mortgages, auto loans, student loans, and credit cards. Having a mixed portfolio will increase your score.

• New Credit - Recent credit activity makes up the final 10% of your credit score. Generally, accounts are considered new for the first 2 years they’re open. Opening many new accounts can indicate financial trouble and lower your score.  

4 Tips to Raise Your Credit Score

In our YouTube video on fixing your credit score to buy a home, Brett shares 4 actionable tips you can implement today to improve your credit score. 

1. Make payments before your current billing cycle ends. Brett says, “When you get your bill in the mail, you’re already late.” Credit companies report information to the 3 credit bureaus when a billing cycle ends. Brett recommends placing your payment a few days before the end of a cycle. When your payment posts, your utilization will decrease, and the lower utilization is what will be reported to the credit bureaus.

2. Become an authorized user. Becoming an authorized user on a credit line with someone with excellent credit can significantly improve your credit. When you do this, try to get added to the oldest credit line with the most available credit and the lowest utilization.

3. Ask for late payment forgiveness. Late payments can remain on your credit report for up to 7 years. If you’ve made a late payment before AND have a positive and long-term relationship with the creditor, reach out and request late-payment forgiveness. The company may forgive this one-time error, and your credit will improve. If the company is hesitant, don’t be afraid to negotiate. You may be able to voluntarily sign up for automatic payments as a testament to your commitment to paying on time moving forward.

4. Opt out of credit offers. Visit Opt Out Prescreen to opt out of prescreened credit offers. This will notify credit companies that you are not actively looking for new credit lines, and you won’t receive pre-approval junk mail for up to 5 years. Not only can this help prevent identity theft, but it may boost your score by 30 to 50 points once in effect. 

Credit Score Checklist

Raising your credit score to purchase a house is no easy task. While there are several things you can do immediately to improve your score, you’ll see the best results with long-term credit-building behaviors. We’ve compiled a checklist of things you can do to improve your score. 

• Review your credit report. Report any errors to the appropriate credit bureaus. 

• Opt out of credit offers.

• Request late-payment forgiveness. 

• Set up automatic payments on your credit accounts.

• Avoid opening or closing too many credit lines.

• Make payments on time and before the end of the billing cycle. 

• Become an authorized user.

• Pay down your debt by finding the right repayment plan for your budget.

• Build a diverse mix of credit.  

If you have any other questions about credit scores and how they may affect your buying process, give Brett Collins a call at 602-330-5521.  If you want to talk about the home buying process please give us a call at 520-836-9301 or find us on YouTube, where we’ll be happy to respond to any questions or comments you might have.