Dear Miss Money Matters,
My husband and I are planning to buy a townhome in about a year. We are living with my parents while we pay off six figures of student loan debt as quickly as possible. Our credit scores used to be around 740, but since we’ve paid off so many of our loans, our scores are now 680. How can we pay off the rest of our student loans but still keep our credit scores as high as possible? We want to get a low-interest rate when we purchase a home.
I was approved for a credit card, and I’m considering getting another one. I don’t want to open too many new accounts at once, but I also don’t want to be penalized for having too few accounts open. We only have a year to boost our scores. What should we do?
– Jen H., Minneapolis
Click to read more about how to get a home loan when you have bad credit.
Likely, your current credit score is good enough to buy a house. You typically can qualify for a mortgage with a score of 670 or higher.
However, you’re smart to want to improve your score. Having a higher score will increase your chances of getting a lower interest rate on your loan. A score of over 700 is considered a good credit score. And to qualify for better rates, you need a comparably higher score.
According to myFICO, if you increased your score from 680 to 700 to 759, you would save about $5,700 in interest over the life of a 30-year loan of $150,000. You could save $12,770 in interest by increasing your score to between 760 and 850. Of course, the larger the loan, the greater the savings you’ll see with a higher score that qualifies you for a better rate.
However, before you start making a plan to improve your score, make sure that 60-point drop in your score is accurate. “Be sure you’re comparing apples to apples by tracking your scores from the same source, as there are many different credit scores that are being given away to consumers,” John Ulzheimer, a credit expert formerly of credit scoring company FICO.
Ulzheimer said paying down your student loan debt shouldn’t have caused such a big drop in your score. Your score does factor into credit mix, however, paying off student loans won’t hurt your mix because the scoring system still considers loans that are paid off, Ulzheimer said. In fact, paying off student loans typically can help your credit score, according to Experian.
Perhaps you could have looked at two different versions of your score, which might explain the discrepancy. The two most common credit scoring systems are FICO and VantageScore, Ulzheimer said. FICO was created by Fair Isaac Corporation and is the most commonly used score by lenders. VantageScore was created by the three credit bureaus — Experian, Equifax and TransUnion.
Both scoring systems base your score on information in your credit reports but weigh that information differently — which can explain the discrepancy in scores. “Be sure you’re comparing FICO to FICO and VantageScore to VantageScore, or you can see confusing differences in the scores,” Ulzheimer said.
More on Home-Buying: How to Buy a House When You Have Student Loan Debt
Another possibility for the 60-point drop in your credit score could be errors in your credit report. “This happens more often than people realize,” said Neal Frankle, a certified financial planner and founder of credit education website Credit Pilgrim.
Frankle recommends getting a copy of your credit report from each of the three credit bureaus. “Go through the reports with a fine tooth comb,” he said, to make sure there aren’t payments mistakenly reported as late, accounts that don’t belong to you or other negative information reported in error.
“In my opinion, this should be the first order of business,” Frankle said. If you find errors, assemble proof that the reported data is indeed a mistake then submit a written request to dispute errors on your credit report, he said.
Another thing you should do is meet with a lender to get preapproved for a mortgage. Although you’re not planning to buy a house for about a year, the preapproval process will help you figure out whether you need to improve your credit score and by how much.
“The broker will pull your credit reports and your husband’s credit reports and get scores directly from each of the three credit bureaus,” Ulzheimer said. “Those are the scores your loan will be based on, and those are the scores you should work to improve.”
The scores used for mortgage lending aren’t the same ones you have access to, he said. Included with the scores your broker gets will be four factors that explain why your scores are what they are, Ulzheimer said. “Those factors are a road map to higher scores, and your score improvement strategy should be guided by them,” he said. “That way you won’t have to guess what to do to improve your scores.”
One thing you might not want to do is open that new credit card you’re considering. It could end up lowering your score, Ulzheimer said.
Click through to read more about ways to raise your credit score in 2018.
Life + Money columnist Cameron Huddleston answers your money questions, drawing from her more than 15 years of experience as a personal finance journalist, as well as advice from financial experts. If you have money questions, send them to firstname.lastname@example.org with the subject line Dear Miss Money Matters.