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Understanding Credit Scores


If you are planning to buy a house, your credit score can make a huge difference in the overall cost of your home. Before applying for a mortgage, make sure you’ve done everything you can to get your credit score as high as possible.

1. First, check your credit report.

You can’t improve what you don’t know. You can request a free credit score report once a year, without negatively impacting your score, at  Or sign up for free at if you want to check your score more often.

These sites pull reports from the three largest credit reporting agencies: Equifax, Experian, and Trans Union.  In addition to checking your credit score, make sure each report is accurate.  Contact the Consumer Financial Protection Bureau (CFPB) is you think their is false or wrong information on your credit score.

2. Pay what you owe.

Your credit rating will significantly suffer if you have a history of skipping payments or paying less than the minimum amount. These behaviors will hurt your credit score more than any other factor.
Don’t let another bill sneak up on you! To stay on top of bills, set up automatic payments from your bank or at least automatic reminders on your calendar.

3. If necessary, sever financial ties.

If you share a joint checking or savings account with someone who has less-than-stellar credit, remove your name from the account, or close it.
If you are in the middle of a divorce or are planning a divorce, be sure the divorce decree addresses credit-related issues. For example, if the other party will be responsible for paying accounts (including a mortgage), your divorce decree should specify a date by which they must refinance loans in their name.

4. Think twice before opening new lines of credit.

Whenever you borrow money or open a credit card, the company extending credit pulls a “hard” credit report, to determine your credit-worthiness. These inquiries may trigger a slight reduction in your credit score.
A common homebuyer mistake involves purchasing major appliances for the new house (using a new credit line) before the mortgage application is complete.  Avoid this at all costs!

5. Exercise caution when shopping for mortgages.

It’s a good idea to shop around for a mortgage. However, make sure you do this within a 45-day window. That way, multiple lenders’ credit inquiries (a necessary step, to provide accurate pricing details) will be recorded as a single inquiry, reducing any negative impact on your credit score. Check out ‘Preparing to Buy’ page for more tips.

6. Pay down your debt.

If all, or even several of, your credit accounts are maxed out, it will hurt your credit score. The good news? Once you pay down the debt, your credit score improves. There is no “memory” of recently maxed-out accounts.

7. Reduce the number of accounts with balances.

While paying off your debt, knock out small balances first to clear the account. Having fewer accounts with open balances will help more than reducing one more substantial account balance.

8. Pay the higher interest rate loans off first.

Once you’ve eliminated any small balances, concentrate on paying down accounts with the highest interest rates. This won’t have a direct impact on your credit rating, but it will free up more money to pay down your debt, which WILL improve your credit score.

9. Leave unused credit accounts open.

Once you’ve paid down a balance, consider keeping the account open, with a zero balance. Admittedly, there are different opinions about whether this will improve your credit score, but the CFPB advises consumers to keep unused accounts open. Doing so raises your “credit utilization ratio”—the amount of credit you’ve EARNED, versus how much you’re BORROWING. Lenders smile on people who use a small portion of what they’re allowed to borrow.

Likewise, consider it good news if a credit card company offers to raise your credit limit. It’s another way to improve your credit utilization ratio and your credit score. Just resist any temptation to drive up your balances!

10. Show credit score stability.

If you plan on obtaining a mortgage soon, try not to change addresses, jobs, or go into business for yourself. Showing stability won’t improve your credit score, but it will make you a better loan candidate, in the eyes of lenders, which improves your ability to get the loan you need at a rate you can afford.

How quickly will you see improvements?
It depends. Many of the steps noted here can generate quick improvements. However, late payments (delinquencies) remain on your credit report for seven years. It can take up to ten years for bankruptcies and unpaid tax liens to clear your report.
The sooner you begin working to improve your credit score, the sooner you will be able to have the best credit score possible BEFORE you buy a house —which can result in substantial savings well into the future.

NOTE: Information from