While many prospective homebuyers would like to believe that they know all there is about their credit score, more than 15 years in the mortgage business has shown me otherwise. On the contrary, MOST knowledge the common buyer has regarding how to properly raise their credit score is incorrect. Therefore, the first thing I would like to do is urge the potential buyer not to do ANYTHING to try and raise their credit score without the direct recommendation of a trusted mortgage professional; as a reminder, I would also like to stress that since every case in individual, there is no general prescription to be written for every situation. Furthermore, I want to address some misconceptions common to the amateur.
First, and perhaps most importantly, I want to take some time to make sure that all are on one page in regards to what a credit score is and how it is generated. Your credit score is a measurement of how likely you, as a buyer, are to default on your payments; the higher the credit score the lower
the risk to the creditor. When generating your credit score what is taken into account is your debt to credit ratio, which is the amount you have borrowed (debt that is carried from month to month) to the credit available to you. The less debt to credit you have the higher your credit score will be.
A mortgage credit score is calculated only by a handful of credit reporting agencies, such as Experian, EquiFax, and TransUnion, and are only available to subscribed trade professionals. The numbers that are generated through free sources and are available to the layperson usually differ form those created by the agencies used by banks and other authorities. Lastly, a little known fact is that checking your credit score lowers it, since it is assumed that the credit report is being generated in order to apply for more lines of credit. The degree that this will affect your credit score depends on what your score is to begin with; the lower it is the more your score will drop.
I have also heard great confusion over how the opening and closing of credit cards will affect a credit score. To explain simply, doing either of these will lower your credit score TEMPORARILY. Opening a new credit card implies that your current amount of credit is not meeting your needs, while closing an existing credit card lowers your score by affecting your debt to credit ratio (lowering the amount of credit available to you). Though doing either of these is not a smart move right before attempting to apply for a mortgage, both are doable with enough time to let your credit score bounce back. Again I stress not doing anything that will dramatically alter your credit sore without checking with your loan officer.
Finally, paying off a collection on your credit report will also temporarily drop your credit score. Smart buyers will only do so when the time is right – based on their loan officers advise.
Maintaining a good credit score is a lot simpler than many believe; to do so, payments should be made in a timely fashion, in order to avoid carrying debt from month to month, and big moves should only be made at the right time. All in all, those with the best credit scores are people with multiple lines of credit who carry very little debt on their credit cards.