Many mortgage lenders tie their interest rates and their approvals directly to your credit score. Going from a 720 to a 719 score could increase your interest rate, and going from 620 to 619 could cost you your mortgage altogether. While some fluctuation in your credit score is normal, managing your credit aggressively can help to keep your score high while you're looking for a new home loan.
Change Almost Nothing
One of the keys to keeping your score high while you're shopping is generally to not change anything about it. Applying for new credit could cause your score to drop because of the inquiry that the lender makes. If you take out new credit that has a payment, such as a car loan or a new credit card where you run up a balance, its payment will get figured into the debt-to-income ratio that your lender uses to decide how much of a payment you can afford. At the same time, you generally won't want to close accounts, either, since closing accounts reduces your overall available credit, which can increase your credit utilization and thereby lower your score. Closing older accounts may also reduce the history on your account, also potentially leaving you with a lower score.
When you shop for a mortgage, lenders pull your credit report. Mortgage inquiries do less damage to your score than other credit inquires, but they still have an impact. One way to minimize your impact is to have all of the credit reports pulled within 14 days of each other. That way, the credit bureaus look at them as a single inquiry and only adjust your credit score once. This means that when you're ready to start shopping for a mortgage, you should narrow down your prospective lenders and then have them pull your credit all at once. Pulling your own score won't hurt your credit.
No matter how busy or distracted you get while you're going through your mortgage application process, don't forget to make your minimum payments. A single late payment can have a significant impact on your score, so paying on time, even if it's the minimum, is a key part of keeping your score high. One strategy that you may choose is to set up your accounts for automatic minimum payments; that way, you'll always be on time and can still pay extra separately, if you want.
Your credit utilization, which is how much of your available credit is actually used, makes up approximately 30 percent of your credit score. If your balances go up, your credit score could go down. For instance, if you have a total credit limit of $13,500, and you owe $2,100, you have a 15.56 percent utilization, but if your balance goes up to $4,700, your utilization goes up to 34.8 percent. You may want to limit how much you use your credit cards as well as pay your balances down to further lower your utilization. This can raise your credit score, and if your minimum payment goes down, it can also improve your debt-to-income ratio.
- Bankrate: Good Credit Score of Past Not So Good Now
- The Mortgage Reports: Keep Your Credit Score High While Shopping For A Mortgage
- Bankrate: How Much House Can You Buy?
- Consumer Finance Protection Board: How Do I Get and Keep a Good Credit Score?
- MyFICO: What Are Inquiries and How Do They Affect My FICO Score?
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.