Credit Score: How Important Is It?

No matter how you look at it, your credit score plays a big role in whether your mortgage application is approved and what rates you qualify for. To a lender, your credit score indicates your dependability as a borrower and, generally speaking, the higher the credit score, the better. As with anyone, lenders want to be sure they are lending to reliable borrowers with a history of making on-time payments. However, while credit score is an important consideration, it isn’t the only thing lenders look at; they will also consider income, debt-to-income ratio, employment history, and assets.

What is considered a “good” credit score?

Within the mortgage industry, the following categorization of credit scores is generally accepted:

A credit score of 740 or higher is considered Excellent.
A credit score between 700 and 739 is considered Good.
A credit score between 630 and 699 is considered Fair.
A credit score below 629 is considered Poor.

What happens when a lender checks my credit score?

When you submit a mortgage application, the lender will “pull your credit”, meaning they request a credit report from the three major credit bureaus: Equifax, Experion, and TransUnion. When a mortgage lender pulls your credit, it is considered a “hard” inquiry, which can have a slight negative affect on your credit score. However, because credit bureaus know that you’re likely to have your credit pulled more than once during the home buying process, any credit pulls from a mortgage lender within a 45-day period only register as one hard inquiry on your credit report.

How does my credit score affect my rate?

As you might expect, the better your credit score, the better the rates. Credit scores are considered in 20-point increments, which means a 20-point drop or jump in your score can change what rates you qualify for. However, mortgage experts advise that if you already have a good credit score, it can be risky to take the time to improve your credit score just to get better rates as rates may rise in during that time. On the other hand, if your credit score has been a barrier to your home financing goals, you may consider some credit improvement strategies

What can I do to raise my credit score?

There are many steps you can take to improve a poor credit score. You may not see changes overnight, but with some effort and consistency, you’ll see your credit score go up.

1. Check your credit reports.
   You’ll want to look at your credit reports as they are now to check for any errors and to see where you can improve. Go to AnnualCreditReport.com to check your credit report for free once a year. Take some time to look through it, you might be surprised by the number of Americans that find errors on their credit reports!
2. Pay all your bills on time.
   Payment history has the largest impact on your credit score. If you want to raise your credit score, you absolutely must begin consistently paying your bills on-time.
3. Work on paying down your credit card balances.
   The credit balance you carry over from month to month is another impactful determining factor for your credit score. Of course, completely paying down your credit card debt is the best move to improve your credit score, but if that’s not possible for you right now, the general consensus is that you should aim to keep your outstanding balance below 30% of your credit limit.
4. Try to abstain from applying for new credit.
   As discussed before, hard credit inquiries can have a slight negative effect on your credit score, so it’s important to avoid applying for new credit when you’re working to improve your credit score or applying for a mortgage. A hard credit inquiry would occur when you apply for things like your mortgage, a new credit card, or an auto loan. More minor requests like a personal credit check, checks done by potential employers, and checks done by your current bank are considered “soft” inquiries, and do not affect your credit score.
5. Sign up for free credit monitoring services.
   This is the best way to watch your credit score change over time.

You may also be interested in working with a credit repair service. Your Loan Officer may be able to refer you to a reputable service.

At the end of the day, your credit score is a major consideration when you apply for a mortgage. However, it’s important to keep in mind that you have some control over your score and if you have had trouble getting approved for a mortgage, there are steps you can take to improve your credit score to buy the home of your dreams. If you’re ready to dive into the home financing process, get started now!