Recent news that more than 25 percent of Americans have credit scores below 600
sends up yet another flare in the real estate world. Securing a mortgage these days isn't easy. Even if you've managed to save for a 20 percent down payment, it won't do you any good if you can't borrow the rest of the money to purchase your dream home.
If your credit rating is sagging, no bank is going to approve your loan. And if you are hoping to take advantage of historically low mortgage interest rates, you want to do everything you can to get your credit rating into shape to secure the best mortgage possible.
The bad news about credit scores was tempered by some good news: The number of people with credit scores over 800 - 850 is the highest sore - increased in the past year, to 17.9 percent. Undoubtedly a lot of people have curbed their spending and been paying down debt.
If you want to boost your credit score, you can take a page from these high achievers. Paying down debt is a good start. But is there anything else you can do to boost your score? The first step is to know your credit rating. If you are planning to purchase a house in the next year, your first stop, before the real estate Web sites, should be AnnualCreditReport.com
. You can request free credit reports from all three credit bureaus - Experian, Equifax and TransUnion - in one place. When you receive the reports, go over them with a fine-tooth comb. Make sure there are no errors. If there is, for example, a credit card with a balance that you've never seen, or a late payment on a loan when you know that was not the case, then report the error to the credit bureau. These reports are used to calculate your FICO score, or credit rating. (FICO stands for Fair Isaac Company, the entity that created and calculates the score.) Ensuring that these reports are accurate is the number one step in getting your credit in mortgage-worthy shape.
That credit report might remind you about credit card accounts that you no longer use. If a mortgage is in your future, it makes sense to think that closing those accounts would be a prudent fiscal move. Not necessarily. If you are concerned that those cards, with all their credit just waiting to be used could tempt you to spend, you are better off putting them in a safe deposit box than closing the account. The reason: Your credit score looks at your total used credit in relation to your total available credit. So, closing an unused card will lower your total available credit, raise the percentage of your used credit, and lower the score. You can read more about FICO's explanation of this consideration, called credit utilization ratio, here
Opening a new account, however, will not help to raise your score. Wait to open that Home Depot credit account until after you purchase your home. Remember, to a mortgage lender, the more credit that is available to a borrower, the higher their risk. One more credit card equals more risk.
And there's another thing that might seem counter-intuitive when it comes to raising your score. Money in the bank is great, but it's not going to boost your score. Your credit score is not based on liquid assets. Those assets will, however, help you keep credit card balances low or paid off. Maintaining a low balance will help to keep your score high.
A little attention to your credit rating now will save you a lot of time - ad maybe even money - when you are ready to buy a home.