Your Credit Score

Your credit score is a number between 300 (high risk) and 850 (low risk) that lenders and credit card agencies use to quickly and objectively assess the credit risk of your application. It tells them things like how promptly you pay your bills, your available credit and how much you owe. The higher your score, the better rates you will receive. Scores of 720 and above will receive the best rates. While applicants with scores below this level won't necessarily be denied a loan, they will not receive the most favorable terms. (Lenders consider many other factors in addition to your credit score, such as your employment history, savings amount and methods, monthly debts in relation to your income, mortgage type and terms, and the property type and value.) Six months before you plan to apply for a mortgage, obtain copies of your credit report. If there are any problems or discrepancies, have them corrected. You can also take steps to improve your score.

Checking Your Score

Credit reporting agencies collect information about you and your credit history from public records, your creditors and other reliable sources. The Fair Credit Reporting Act (FCRA) is the federal law that regulates credit reporting companies and protects consumers' rights, including the ability to challenge items on your credit report. In the event of a dispute, the credit bureau has 30 days to investigate and take the appropriate action.

Get copies of all three credit reports six months before you apply for a home loan. An error on your credit report can take months to clear up. Credit agencies do not share information. So any errors must be corrected with each agency separately. The 2003 Fair and Accurate Credit Transaction Act allows consumers to request one free copy of your credit report each year from each agency. Implementation of this new law has been slow and won't go into effect until 2005.

The three main credit bureaus are:

Credit Score Calculations

You credit score takes into account a number of factors:

• Payment history (35% of your score): How promptly you pay your bills has the biggest impact on your credit score. If you have a few late payments, an overall good credit profile tends to lessen the impact of these.
• Amounts owed (30% of your score): Owing money doesn't necessarily mean you are a high-risk borrower. However, the more accounts you owe money to, the more likely you are to be over-extended and presumed to be less credit worthy.
• Length of credit history (15% of your score): Generally, a longer credit history will improve your score because it shows how you manage your finances over time.
• New credit (10% of your score): Lenders tend to be wary of applicants who have opened several new accounts within a short period. They are viewed as a greater risk because of the amount of credit available to them, which can affect their ability to make their monthly payments. You will not, however, be penalized for rate shopping. The report does make a distinction between this and new credit accounts.
• Types of credit in use (10% of your score): The less information your credit report contains, the more important this factor becomes. It simply is a reflection of the mix of credit you have: credit cards, mortgage loans, installment loans, retail accounts, etc.
  

How to Improve Your Score

There are a number of things you can do to improve your score. Some take a whi le to be reflected in your rating. So, the more time you allow yourself to work on increasing your score before you apply for a mortgage, the better your chances of receiving favorable rates.

• The most important thing you can do is pay your bills on time. If you have missed payments, catch up and don't miss anymore.
• Moving your credit card balances around to receive a better interest rate will not help your score unless you also pay off the debt.
• Keep low balances on credit cards and other accounts.
• Only apply for the credit you need. Opening a number of accounts within a short period can reflect negatively on your score, especially if you do not have a long credit history.

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