When it comes to credit scores, it’s been said that “everyone has a number, so you might as well have a good one.”
Credit scores determine your “cost of money,” and are factors in a variety of expenditures, including insurance, auto loans, credit cards, employment and of course, home buying. Credit scores of 800 and higher are the gold standard, but typically scores in the 760+ range will qualify for the best mortgage interest rates. Conventional loans tend to be rather sensitive to credit scores. If a government loan, such as a VA, USDA, and FHA program, is an option, home buyers can have credit scores in the mid 600’s, and qualify at terms that are similar to a 740 score conventional loan.
Here are a few pointers to keep in mind that will keep your score as high as possible and help you qualify for more favorable mortgage terms.
• Paying off loans & closing accounts can actually LOWER your score – Sometimes, loans with 10 payments or less remaining don’t factor in a credit score, so a home buyer is better off keeping more liquidity. Revolving accounts allow consumers to have theoretical access to more funds. So having a larger credit line is a better option.
• Department store cards and holiday shopping can hurt scores – Store and credit card intro offers can be tempting, but the end result may not be worth it for 3 reasons. 1) Credit inquiries tend to lower credit scores, 2) new accounts affect the average age of credit, which also lowers scores, and 3) department store cards and introductory programs often have low credit limits. If you spend to near their limits, your credit score can be negatively impacted as well.
• Be mindful of “credit score basics” in managing your credit – Pay off debt instead of shifting it around, keep balances as low as possible, pay bills on time, get current if you’ve fallen behind, and don’t close your unused accounts.