Empowering Yourself Through Your Credit Rating

Your FICO score is the number makes-or-breaks your ability to buy a house and determines whether you get the best rates or get charged enormous fees. You can directly affect the strength of your credit and, in turn, how much your dream house really costs you.

FICO Score Breakdown
FICO Score Breakdown

When applying for a mortgage, your credit rating is the primary factor in whether you qualify and how much you will pay in fees and interest. Your credit rating can be boiled down to one number between 300 and 850: your FICO score. It's meant to be a quick illustration of how likely you are to pay your bills on time, if at all.

In general, if your FICO score is above 720, you will have flexibility in what loans you can ask for and may qualify for a discount, and if your score is above 800, you have considerable bargaining power.

But if your FICO score is 680 or below, mortgages will be more expensive and much more difficult to get. The chart above illustrates what factors get taken into account when determining your score.

Helping Your Credit Rating

  • Have and use at least one credit card
  • Only sparingly apply for loans, credit cards, or new lines of credit
  • Pay your bills on time
  • Reduce your debt and outstanding loan amounts
  • Pay your credit card bills in full each month

One key point about your FICO score is that not having a credit history is almost as bad as having a bad one, so building evidence that you're a person who pays bills on time is important, but there's an additional nuance.

Your score is actually based on your debt ratio: how much credit you've used compared to how much you have.

Clearly your FICO score isn't going to be strong if you've maxed out all your credit cards and have car loans, student loans, and that zero percent financing deal hovering on your credit report. But it'll also be weak if you have a small amount of available credit and are using a large portion of it.

Hurting Your Credit Rating

  • Paying bills late, missing payments, or bankruptcy
  • Applying for credit haphazardly or too frequently
  • Having too many credit checks run against you
  • Closing credit card accounts right before you apply for a loan
  • A major purchase on a credit card before you apply for a loan

Some of these points are obvious, but it may seem counterintuitive but closing credit card accounts before applying for a mortgage may hurt your credit rating as much as making a major purchase. It all goes back to your debt ratio and how much of your available credit you're using.

You want a balance between having a reasonable amount of available credit and not using too much of it.

And remember, while most actions don't change your credit score significantly, people whose scores hover around 720 need to be very careful to ensure it stays above any cutoffs pre-determined by your lender.  This will help your loan close and may help you get a better rate.

The Thought Process

FairIssac, the creator of the FICO score, has articles on what goes into your FICO score and how to improve it, but they only pay cursory attention to how mistakes are made.

Even in a computerized world, a great deal of financial information is transfered from one handwritten sheet of paper to another before it is keyed into a computer, which we know isn't perfect either.

The challenge is what to do if you believe there is a mistake causing your credit score to be lower than it should be. Knowing your credit information beforehand will give you leverage, or at least knowledge, when speaking with your lender.

You should empower yourself by getting a copy of your credit report beforehand, and if you suspect there is an error, call each of the appropriate credit bureaus, Equifax, Experian and Trans Union to rectify the problem.

Bankrate.com offers a helpful article on fixing an inaccurate credit report, plus, if you are in a hurry to make a house purchase, you can request a rapid re-score by the credit bureaus for a fee.

If you're sure you're going to buy a house, you should get not only your credit report but your FICO score as well. The major credit bureaus will sell you your "credit score" but unless it is your FICO score, it won't be relevant for your mortgage application.

Bottom line: you can secure a less-expensive mortgage more quickly by paying all your bills in full and not making any major financial changes during the mortgage process.