Redeeming your home buying potential

If you’re looking to buy a house within the next 12 months, why not make your resolution one that will improve your financial situation and position you as an ideal home buyer? That’s right – we’re talking about your credit score.

The lending world has changed considerably since the boom days and so has the credit score required to qualify for a loan, not to mention a low interest rate. “About two years ago, you could have had a score of about 620 or so to get a lender’s best rate on something. Now, lenders are really looking at a rate of 760 at the least,” said Kelli Grant with SmartMoney.com. First-time homebuyers fare much better, needing a credit score of at least 660 unless they try for an FHA loan. The truth is, to be a “good” buyer in the eyes of lenders you need to keep a close watch on the state of your credit score. Here are several tips to maintain and improve upon your current number.

Get copies of your credit report–then make sure the information is correct. Go to
www.annualcreditreport.com. This is the only authorized online source for a free credit report. Under federal law, you can get a free report from each of the three national credit-reporting companies every 12 months.

Pay your bills on time. One of the most important and easiest things you can do to improve your credit score is pay your bills by the due date. You can set up automatic payments from your bank account to help you pay on time, but be sure you have enough
money in your account to avoid overdraft fees.

Understand how your credit score is determined. Do you pay your bills on time? The answer to this question is very important. If you have paid bills late, have had an account referred to a collection agency, or have ever declared bankruptcy, this history will show up in your credit report.

What is your outstanding debt? Many scoring models compare the amount of debt you have and your credit limits. If the amount you owe is close to your credit limit, it is likely to have a negative effect on your score.

How long is your credit history? A short credit history may have a negative effect on your score, but a short history can be offset by other factors, such as timely payments and low balances.

Have you applied for new credit recently? If you have applied for too many new accounts recently that may negatively affect your score. However, if you request a copy of your own credit report, or if creditors are monitoring your account or looking at credit reports to make prescreened credit offers, these inquiries about your credit history are not counted as applications for credit.

How many and what types of credit accounts do you have? Many credit-scoring models consider the number and type of credit accounts you have. A mix of installment loans and credit cards may improve your score. However, too many finance company accounts or credit cards might hurt your score. To learn more about credit scoring, see the Federal Trade Commission’s website, Facts for Consumers.

Beware of credit-repair scams. Sometimes doing it yourself is the best way to repair your credit. The Federal Trade Commission’s “Credit Repair: How to Help Yourself” explains how you can improve your creditworthiness and lists legitimate resources for low-cost or no-cost help.

Source: www.federalreserve.gov/pubs/creditscore/default.

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