Taking control of your credit score

Your credit score is a number that typically ranges from 300 to 850 and it (along with your credit report ) provides lenders with a snapshot of how you've handled your credit in the past. Your score is one of many factors a lender considers, and there are no set rules about what score is required to qualify for a loan; however, you may find it difficult to obtain a loan if your score is under 620.

Contact any of the three major credit reporting agencies to get your report and your score: Equifax Opens in a new window, Experian Opens in a new window, and TransUnion Opens in a new window. Or visit www.annualcreditreport.com Opens in a new window, a site sponsored by the three agencies. There you can order your score and get more information. (Be aware that you will be asked for personal information, such as your Social Security Number, in order to verify your identity.) You're entitled to a free credit report from each agency once a year.

Homebuyer Tip: When you get your credit score, it can also come with up to four explanations of why it is not higher. This is a great opportunity to understand and target factors affecting your score. If you have any questions, contact the agency directly for clarification.

No matter what your credit score looks like, you can seek opportunities to make it better. Your score is calculated using five factors from your credit report: amount owed, payment history, length of credit history, new credit inquiries, and types of credit in use:

1. Amount owed: This is a comparison of your total available credit to the amount you currently owe. Keeping your debt low makes you more attractive to lenders (and saves you interest charges). Lenders generally like the amount of credit you're using to be under 20% of what's available to you. So if you have two credit cards, each with a limit of $5,000, you want a total debt of $2,000 (or 20% of $10,000) or less. Whether you have several cards with smaller limits or fewer cards with higher limits is up to you. But opening more cards just to increase your available credit limit and affect this ratio is not a good strategy: this can actually shorten your credit history (more on that below).
2. Payment history: This part of the score measures how you've paid all credit/debt accounts. Using credit cards creates a payment history, while using debit cards and cash doesn't. A history of carrying debt and paying it off on time shows lenders that you're responsible with your money and helps make them confident that you can pay your mortgage in the future.

   Homebuyer Tip: Always paying your mortgage on time is one of the best ways to maintain healthy credit. If you are concerned about your ability to pay your existing home loan, talk to your lender.

3. Length of credit history: This takes into account the age of your oldest account, the average age of all your accounts, and the time since the last activity on each account. Opening a new credit card could potentially shorten your average credit history. And hanging on to an older credit card, even if you're not using it, could show lenders a longer history of established credit.
4. New credit accounts and inquiries: Every time you open a new account or apply for a new account an inquiry is created, which affects your score. Limiting the number of times you apply for a new account helps reduce inquiries that can lower your score. Be aware that in certain situations, such as shopping for a mortgage, numerous inquiries made during a short time period typically won't hurt you, because the credit agencies know you are shopping for the best loan.
5. Types of credit in use: On your credit report, it will list the number of your accounts that are credit cards, installment loans, mortgages, etc. Check your credit report for accuracy and report any errors to the credit agency. (If you are a cosigner on any accounts, these accounts will also appear as your own.) Also, keep in mind that closing accounts or paying them off will not hide delinquencies.

   Homebuyer Tip: Consulting with a credit counselor or financial advisor on your personal situation is a good method for learning how to improve your score.