A healthy credit score is one of the most important financial tools. Suppose you're considering purchasing a home or even moving to a new rental. In that case, someone else will look at your credit score.
Quick Facts:
- A credit score is a 3-digit number based on information reported to each credit bureau.
- Credit scores are calculated using financial models. FICO 8 is the most widely used credit score today.
- Depending on the scoring model, a good credit score is about 650, and an excellent credit score is usually over 750.
- Your credit score can change every time a lender reports information.
- Your score will differ depending on the credit bureau.
- There are 3 primary credit bureaus. Not all lenders use the same bureaus. However, when applying for a mortgage, it is common for lenders to check multiple credit bureaus.
- Borrowing rates are based primarily on your credit score, income, and the amount of debt you have.
Before you apply
Before you even start the preapproval process, I recommend doing a credit check on yourself. You can get a free copy of your credit score from all three major credit bureaus by visiting AnnualCreditReport.com. Federal law allows you to get a free copy of your credit report every 12 months. Through December 2022, everyone in the U.S. can get a free credit report each week from all three national credit bureaus (Equifax, Experian, and TransUnion). This is a big deal for homebuyers because you can monitor your credit weekly.
Other tools like https://www.creditkarma.com/ will provide you with a free credit score each week. Remember that these sites often use different scoring models, so check with your lender to see what model they use.
You can file a dispute if you find inaccurate information on your credit report. You will need to prove that the data is incorrect to remove it from your credit report.
Your credit score is calculated using a mathematical model. In general, your score is based on your credit history, the amount you owe, the amount and type of credit that has been extended to you, and the number of times your credit has been checked in the past two years. Paying down your credit card balances is the fastest way to increase your score.
During the mortgage process
Getting a mortgage can seem grueling, especially if you're self-employed. Your lender will review your credit, verify your employment, and check your last 2 years' tax returns after the preapproval process. The day before or the day of closing, the lender often looks at your credit to ensure nothing has changed. Once you apply, there are a few things you should NOT do.
- Do not apply or take out new loans or credit cards
- Do not co-sign for anyone else to borrow money
- Do not close any accounts you currently have open. Closing an account can reduce your credit score.
- Do not charge up your credit card balances; keep them as low as possible.
- Do not miss any payments
- Do not change jobs
Finally, Beware of "Fast Fixes"
Suppose you've had any late payments, foreclosures, or repossessions. In that case, this information stays in your credit report for up to seven years. If you've filed for bankruptcy, this information can remain in your report for up to 10 years.
Some companies claim they can "fix" your credit for a fee. While you can have inaccurate information removed, it is legally impossible to alter an accurate credit history. Instead, consider contacting a member agency of the National Foundation for Credit Counseling (NFCC), the nation's largest national nonprofit credit counseling network, by calling 1-800-388-2227 or visiting www.nfcc.org.
Tara Barboza, CPA
360Berkshire Realty Group