Building Good Credit

Better Credit, Better Mortgage Rate: Understand and Improve Your Credit Score

Your credit record has a significant impact your probability of securing a mortgage. It also influences the interest rate that you are offered. It’s important to improve your credit score as much as possible in order to get the best interest rate available.

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Your Credit Record

Your credit record documents how well you have handled credit in your past and how you use it right now. Your credit record is kept electronically by each of three private companies: Equifax, Experian, and Trans Union.

A credit report lists the information in your credit record at one of these companies. It shows your debts and payment history with people and companies who have loaned you money, such as banks, credit card companies and department stores. It shows whether you pay bills on time and whether you pay the proper amounts due. Your credit report also shows any history of tax liens, bankruptcies, etc., even if any of these have happened several years ago.

How Your Credit Report Impacts Your Mortgage Application

Before you even meet with a mortgage lender, you should get copies of your credit reports and review them. One of the first things a mortgage lender will do when you ask for a mortgage loan is to order a copy of your credit report. As part of the credit report, lenders often get a credit score. A credit score is a computer-generated number that tells them how likely you are to repay your debts.

How Your Credit Score Is Calculated

A credit score is calculated by analyzing all the pieces of information in your credit record and summarizing them in a number. Your credit score will be used – along with your credit report and other information from your mortgage application – to determine whether you will get a mortgage to buy or refinance your home. Your credit score also may be used to determine the interest rate you get on your mortgage.

The most commonly used credit score today is known as a "FICO" score. A company named Fair, Isaac & Co. developed a mathematical way to look at factors in your credit record that may affect your ability and willingness to repay a debt.

These factors can include your record of repaying loans, i.e., student loans, car loans and credit card bills; any public records you might have, like tax liens and bankruptcies; how often you apply for installment loans and new credit cards; and how much you actually owe. For example, if you charge up to the limit on your credit cards – even if combined they don't seem to add up to a lot of money – this might hurt your credit score. Or, if you have recently applied for several credit cards, including department store payment plans or credit cards – even if you haven't begun to use them yet – your credit score might be affected negatively.

What Makes Up a Borrower Profile

Mortgage lenders look at other information besides your credit score before deciding whether to make you a mortgage loan. They look at your employment history, your income and outstanding debt, savings patterns and amount of savings, and the type of mortgage you want. Mortgage lenders also look at the value of the property you want to buy or refinance and the amount of the down payment you plan to make or the equity that you have. All of these factors combined together make up your "borrower profile." Mortgage lenders view this full picture to make a final decision about your ability and willingness to repay a mortgage loan.

What You Can Do to Improve Your Credit Score

How you've paid your bills in the past is usually the best indicator of how you'll pay in the future. Be sure to pay at least the minimum amount required by the date it is due on your account statement or invoice. You can always pay more but you should never pay less than the minimum. Remember – being late on a payment is a negative mark on your credit record, even if you make up the payments later.

Close accounts you never use and try not to draw down too much of your remaining credit lines. Don't apply for too many loans or too many credit cards either. This might be interpreted as a sign that you can easily get in over your head on payments you owe.

You need to have some credit history to have a credit score. Sometimes having a very limited credit record can have a negative effect on a credit score. If you rarely or never borrow money or use a credit card, consider applying for a credit card and using it carefully, paying off the debt each month as required.

Getting a Copy of Your Credit Report

It's important that you review your credit reports from each of three private companies – Equifax, Experian, and Trans Union – at least once a year to make sure they are right. Your credit record, and therefore, your credit report may vary from one company to the other.

Equifax

Credit Information Services
P.O. Box 740256
Atlanta, GA 30374-0256
Phone: 1 (800) 685-1111
Web Site: www.equifax.com

Experian

National Consumer Assistance Center
P.O. Box 949
Allen, TX 75013-0949
Phone: 1 (800) 682-7654
Web Site: www.experian.com

Trans Union

National Disclosure Center
P.O. Box 390
Springfield, PA 19064
Phone: 1 (800) 888-4213
Web Site: www.tuc.com

Correcting Mistakes on Your Credit Report

If you believe that any one of your credit reports contains mistakes and you wish to dispute or change the mistake, contact the national credit repository that developed the report. Under the Fair Credit Reporting Act (FCRA), the repository must investigate your disputed items within 30 days. You'll also receive written notice of the results of the investigation within five days of its completion, including a copy of your credit report if it has changed based upon the dispute.

For Additional Information

The Federal Trade Commission

The Federal Trade Commission (FTC) is responsible for enforcing FCRA. The FTC also publishes consumer-related credit brochures where you can obtain additional information on credit reports.

To contact the FTC, call or write:
Public Reference Branch
6th & Pennsylvania Avenue, N.W.
Washington, D.C. 20850
Phone: (202) 326-2222

Web Sites:
www.ftc.gov/ftc/consumer.htm
www.ftc.gov/ftc/moreinfo.htm

Mortgage Bankers Association of America

Mortgage Bankers Association of America (MBA) is the national association representing the real estate finance industry. The MBA promotes fair and ethical lending practices and fosters excellence and technical know-how among real estate finance professionals through a wide range of educational programs and technical publications. Its membership of approximately 2,800 companies includes all elements in the mortgage lending field: mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance companies and others.

Web site: www.mbaa.org/

The National Foundation for Consumer Credit

The National Foundation for Consumer Credit (NFCC) is a network of 1,300 local non-profit organizations that provide consumer credit education, confidential budget and debt counseling, and debt repayment programs to families and individuals.

Web site: www.nfcc.org/