Applying For A New Mortgage? Make Sure Your Credit Score Is At Its Best

Why a top credit score matters

You may already know how important it is to have the best credit score possible. Your credit score typically affects how much you pay on your home mortgage, your new car loan, and even your cell phone contract. Depending on where you live, it may influence how much you pay in car insurance, and whether you get that new job.

Like it or not, your credit score is a key measure. We’ve seen it called a “financial report card for grown-ups,” and that’s a fair assessment. You want it to be as high as possible.

So what happens if you’re applying for a new mortgage, and want to make sure your credit picture shows you in the most favorable light?

Start with your credit score – your “financial report card”

You can start by checking up on your credit score.

There are actually several different credit scores out there, each compiled according to a different formula, but to keep it simple you can start with your FICO® Score. It’s used by 90% of all top lenders. Contact myFICO.com to obtain a paid version of your score, or tap into free services offered by credit card providers like Discover. You don’t have to be a Discover cardmember to access the free online service, and checking yourself out online will not impact your credit. It takes less than 5 minutes to register on their site, obtain your FICO Score, and receive a detailed breakdown of how you rank and why.

How Your FICO Score Is Calculated

There are five main components to your FICO score. Here’s a breakdown:

Payment history (35% of your score): Consistently paying creditors on time is the most important factor in determining your credit score, says Discover. “Even one missed payment can have an impact.”

Revolving utilization, or credit utilization (30% of your score): This is an important factor that can trip consumers up. It measures how much credit you’ve used (what you owe on credit cards), divided by how big a credit line is available to you. Lenders keep an eye on this to see if you’re overspending, and prefer ratios below 30%. Even if you pay your credit cards in full each month, you’re using credit and affecting the ratio. By the way, don’t close unused cards right before you refinance or apply for new credit. It will ding your utilization ratio.

Length of Credit (15% of your score): The longer your credit history, and the longer your accounts have been open, the better.  FICO will look at the age of your oldest credit account, the age of your newest credit account, and the average age of all of your credit accounts.

Inquiries (10% of your score): A hard inquiry is when a lender checks your credit when you apply for a new credit card or loan. In general, says Discover, you don’t want too much credit seeking activity or inquiries in a short period of time, as that suggests you’re contemplating adding more debt.

Credit Mix (10% of your score): Your credit mix looks at what type of credit is being used, such as installment loans (like a car loan) or revolving (credit card) debt. “An ideal credit mix includes a blend of revolving and installment credit,” says credit reporting company Experian.

What if your credit score needs some help?

If you’re happy with your credit score, you’re good to go. But what if there’s room for improvement?

Your next step may be to look deeper into the detailed account reports in your credit file that influence your overall score.  Credit report details are available free online from the big three credit reporting companies.

If there are errors that need to be fixed, follow the instructions provided by each credit reporting company. Otherwise, address whichever component of your credit score is giving you problems. For example, if payment history is your weak point, work out a system to pay your bills automatically to avoid late payments.

A good credit score can save you thousands of dollars in reduced interest costs, so check it periodically to make sure your “financial report card” is portraying you in the best possible light.

Want more information about managing your credit? Read “3 Quick Things To Know About Your Credit Score”   

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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