Credit scores, or FICO scores, are one of the primary tools used by lenders to try to assess the likelihood of your default on a loan, and whether you will make timely payments if they extend credit to you. When you apply for a mortgage loan, one of the main things a prospective lender will look at, when determining your creditworthiness, is the average of your credit rating as it is presented by the three major national bureaus. They will also look at your credit reports, how much revolving debt you have on your credit cards, and whether you pay your bills on time.
The credit bureaus keep an invisible paper trail of all of your account activity when it comes to credit and loans. When you make a payment on your credit card, or open a new account, this information is reported to the credit bureaus and added to your credit report. If you default on an account, or if you are habitually late on your payments, that is reported to the credit bureaus as well. Your three digit credit score is a summarization of the information on your credit report, and helps lenders to see at a glance what sort of history you have had with credit.
Before you walk into the bank, there are many things you can do to clean up your credit and make sure you are presenting the best possible credit score to any prospective mortgage lenders. Here are a few things you can do to give your credit score a boost if you are looking to purchase a home.
First, you might want to pay down your credit cards. One thing that banks look at is your debt-to-income ratio (DTI), so the less revolving debt you are carrying, the better. It’s generally considered advisable to get the balances down to less than half of the total credit you have available.
Second, you should probably obtain a copy of your credit report and address any outstanding debts, or dispute any incorrect information. If you can get errors removed, that will bring your score up almost immediately.
Bad credit won’t completely disqualify you from getting a home loan. But the better your score, the better your interest rate will be.