Improving Your Credit Score

Whether or not you qualify for a mortgage loan depends in large measure on your credit score. A credit score is a summary of your credit report and a numerical measurement that reflects your management of credit.

Credit scores fall between 300 and 900. A score of 700 is considered good. If yours is low, there are ways to raise it. The formula for good credit follows three basic principles.

First, pay your bills on time. Pay early, if possible. When lenders look at your credit report, they look for assurance that you "pay as agreed." This is important to mortgage lenders. They want to know you will make your mortgage payments on or before the day agreed upon.

Occasionally missing a payment should not affect your ability to get new credit. Consumers who have a pattern of frequently paying late, however, are considered greater risks that those who consistently pay on time.

Filing for bankruptcy, having your car repossessed or having a mortgage foreclosed will have a major effect on your credit score and your ability to get new credit in the future.

Second, you should pay down high balances. Be cautious, however, about closing accounts. Sometimes closing an account can hurt your credit score. Why? Consider the lender’s perspective. A credit report that shows you closed three accounts in six months will only raise lender suspicion that you are trying to make your credit look better than it really is. Don’t forget — lenders look back two years when looking at your credit history.

Just as it is important that you pay your bills on time, it also is important that you control how much money you owe, especially on credit cards. Lenders are increasingly concerned about consumers who seem to overextend themselves by using most or all of their available credit — even if they are making payments on time.

Third, keep your credit report accurate. You should periodically review your report from the big three credit bureaus; contact information for them can be found at the end of this column. Again, aggressively closing accounts could generate a notation from the bureau’s computer. If you want to close an account that was part of some promotional offer, send a letter to the bureau stating you never used the account.

What if you don’t have any credit references on your credit report or just a few charge accounts? Will you be able to get a mortgage loan?  Yes. You can obtain a mortgage loan even if you have limited credit. With as few as one credit reference, it is possible you may get a credit score from a lender.

Also, a lender may develop what’s called a "nontraditional" credit report for you. A nontraditional credit report contains information on how you manage financial obligations like rental payments, utility payments and other items that do not normally appear on a credit report. You do not have to have credit cards. The lender just needs to be assured you make your payments. That’s the bottom line.

Now, it’s your turn to be the lender. Would you give these people a mortgage loan?

• Bob’s credit score is 718. His wife, Gloria, has a 698. They have several late payments noted on their credit report. Their reports note the delinquencies are recent, their balances on credit high and their credit history short. Would they get a loan?  hey have very good credit scores. The lender checked to ensure the scores included all relevant information. Their loan was approved. Scores in the high 600s or low 700s are almost always approved.

• How about Gene and Sharon? He has no credit history. Sharon’s score is 709. The lender assumes Gene pays cash for everything. Sharon’s report covers 11 years during which she opened nine credit cards, three with revolving accounts. She has no late payments. She made one late car payment of 60 days.  Their loan was approved. The lender found that Gene does prefer to pay cash. His noncredit references were good. Sharon’s one late car payment was because the payment was lost in the mail.

• Lastly, consider would-be borrower Diana. She is single and has a credit score of 628. She has several derogatory credit notes from three years ago. Her report notes a serious delinquency was put in the public record or a collection was filed. She has opened many accounts in the last 12 months and is the co-signer on two accounts with her daughter and one with her ex-husband. Would you give her a mortgage loan?  Diana doesn’t have a very good credit score, and the lender initially turned her down. But Diana protested saying, "I have perfect credit." She claimed her credit report was in error. Upon investigation, Diana found her daughter had lost a payment book on one of the loans the mother had co-signed for. Her daughter had been ignoring the overdue notices, but Diana did not know about them.  Diana had heart-to-heart chats with her daughter and ex-husband. She got them to sign releases of liability for the loans they were not paying. She got her home loan.

The latter case emphasizes the importance of verifying the information in your credit report. If she had known her daughter was missing payments, Diana could have taken action sooner and avoided being turned down for the loan initially.

You should obtain and review a copy of your credit report before you apply for a mortgage loan. To obtain a copy of your credit report, contact these credit bureaus:

Equifax at 800-685-1111 (equifax.com)

Trans Union at 800-916-8800 (tuc.com)

Experian at 800-682-7654 (experian.com)

Courtesy of  the Real Estate Center at Texas A&M University, March 2001.