Understand your credit rating
Your credit rating helps determine how likely you are to pay back your loan. It is one of the key drivers of the loan decision. A good credit rating can help you get better loan options and interest rates.
Factors that are used to calculate your credit score
A credit bureau will evaluate several factors related to your relationship with credit and then give you a credit score, also called a FICO® score (named for the developer, The Fair Issac Corporation). The primary factors that affect your credit score include:
How well have you repaid other loans in the past? Did you miss payments? Did you fail to pay back a debt entirely? All will drive down your score. Have you ever declared bankruptcy or gone into collections?
How much credit card debt do you have? Are your credit cards maxed out? What other outstanding loans do you have, like car loans or student loans, and how much do you owe on them?
Length of credit history
Your credit score will take into account not only how well you've been handling credit, but for how many years. It will look at the amount of time that has passed since you opened each credit card or account you have and look at the timeline of activity on the card or account.
Your credit score
Your credit score will also take into account how often you apply for new credit and the types of credit you currently use, as well as the balance remaining on your credit cards, car loans, student loans, etc.
Get your credit score
Before you start shopping for a home, you should get a copy of your credit report. Your credit report will be created by one of the major credit reporting agencies: Equifax, TransUnion, or Experian. Banks use the credit score created by these agencies to evaluate whether to give you a loan, how much to lend you, and at what rate. If you see any errors on the report, you can contact the credit agency and get them corrected before applying for a loan. Correcting those errors can bring up your credit score.
By law, you can check your credit report once a year for free.
Understand your credit score
Your credit score is a three-digit number that can range from 300 to 850. Most scores range from 600 to 700. A higher credit score increases your chances of getting approved for a loan and obtaining a lower interest rate.
How to improve your credit score
Unfortunately, there is no quick fix for improving your credit score. But if you work at it steadily, there are several things that you can do over time to improve it. Here are a few:
- Correct any errors you find on your credit report. Look for things like incorrectly listed late payments. If you find errors, dispute them with both the credit bureau and reporting agency.
- Pay all your bills on time every month. Sounds simple enough, but if you have trouble remembering this task, consider setting up email or text payment reminders with your payees.
- Reduce the overall amount of debt you owe. Create a plan to pay off your highest interest rate debts first while maintaining minimum payments on your other accounts. You may want to get help from a credit counseling service.
- Pay at least the minimum on your credit card every month, and pay more if you can.
- Don't go over the credit limit on your credit cards, and try to keep your balance to 25% of your maximum credit limit generally.
- Make sure you've shown a pattern of paying back debts. If you've never taken a loan or used a credit card, that could result in a lower score.
- Even if you're no longer using a credit card, consider keeping it rather than closing it in an effort to raise your score. Closed credit card accounts are included on your credit report. Closing an account may actually work against you. Likewise, don't open a number of new credit cards in an effort to increase your available credit.
- Avoid other big purchases until you close on your house.