Understanding Your Credit Score

There’s been a change with mortgage lenders in the past year or so, and higher scores are now required for the best rates because default rates have been going up. To ensure the best deal on your home loan, aim for a FICO score of 760-plus. Here are several tips on how to maximize your FiCO score:

1. Stay on top of your credit reports. You’re entitled to one free copy per year from each bureau. Get them at annualcreditreport.com, and look for misreported delinquencies, over-reported loan amounts, and underreported credit limits. Request corrections from the bureau in writing.

2. Pay bills within the grace period. Lenders report tardiness to the bureaus once you’re 30 days past due; if your score started at 780, it can go down to 680 after just one delinquency, says Watts. So set up payment reminders or have payments automatically deducted by a certain date.

3. Focus on paying off credit cards vs. other debt. Whittling down revolving debt will do a lot more for your score than erasing installment loans. Paying off a $250,000 mortgage when your score is already high will boost it by only five or 10 points, says Watts. But wiping away a few thousand bucks on plastic can add 100 points.

4. Stay under the magic 10%. Just paying credit card balances off every cycle doesn’t mean you have a 0% utilization; issuers report the total amount you charge each month to the bureaus. That suggests you should use credit cards sparingly, says Watts. Aim to spend no more than $2,000 on a $20,000 line; and put cards on ice a few months before applying for a loan.

5. Have a favorite credit card. The FICO model penalizes you for having multiple balances, so limit the bulk of your spending to one card. That said, issuers are closing inactive lines, which can hurt your utilization ratio. So make small charges to your other cards every three months or so.

6. Ask FICO what else will work for you. FICO offers a free Score Simulator tool to those who buy scores on myfico.com, and this allows you to see how your score would respond to certain actions, such as paying down debt or even taking on new loans.

(Source: MONEY Magazine)