Clean Up Credit, Get the Best Mortgage Rates

With the peak home-buying season kicking off, savvy buyers will be scouring the newspapers, checking the Internet and pounding the pavement, not only for the perfect house… but also for the best mortgage rates.
Shopping around is important, but it shouldn’t be the only strategy for getting the lowest home loan rate.

Just as crucial is making sure your credit report is in good shape.

“Lenders view your credit rating as your reputation,” said Lucy Duni, director of education for TrueCredit.com, a site run by credit bureau TransUnion.

People with the highest credit scores get the best rates, while those with the lowest scores may not even qualify for a home loan.

Ideally, you should begin steps to spruce up your credit report at least 3-6 before applying for mortgages or home equity loans, Duni said.

That should give you enough time to dispute any errors in your files and to change or avoid some behavior that could be damaging to your scores.

• Overall, the best ways to protect your score are to pay your bills on time - even if it’s just the minimums - and to keep credit card balances low.
• If your cards are bumping up against their limits, paying them down to under 35 percent of your available credit will boost your score.
• For example, if the limit on your card is $10,000, make sure the revolving balance is below $3,500.

You also should avoid making too many credit applications prior to going for your mortgage. That means passing up those enticing offers to open a store credit card for an instant 20 percent off your purchases.

Each time you apply for a card, it triggers an inquiry into your credit history, lowering your score by up to 12 points.

Those hits can quickly add up.

Another common mistake, Duni said, is closing old credit cards. People with bad credit may think they can improve their scores by closing all their accounts, but the reality is that doing so actually could be damaging because it would wipe out the person’s credit history.

“The biggest factor in a healthy credit score is a long, healthy credit history,” she said.

Dumping a long-standing account could hurt your score by lowering the average age of your remaining accounts.

“Think twice about closing your oldest account,” Duni said.

Under federal law, you can get a free copy of your credit report once a year from each of the main credit bureaus, Experian, Equifax and TransUnion. Otherwise, you’ll have to pay for them.

Review the reports for any errors that might be bringing down your score, Duni said. For instance, you may see any late payment on a bill that you know you paid on time. In that case, file a dispute to fix it.

The law doesn’t entitle you to get your credit scores for free, so if you want to see those, you’ll have pay for them. A mortgage lender is required to give consumers their credit scores obtained as part of the application process, but by then it would be too late to do anything to change them.

The cheapest way to get your credit scores is to order them at the same time you are requesting your free annual credit reports.

Consumer groups recommend getting what is known as a FICO score, which ranges from 350-850 points, because it’s the score creditors rely on.

Equifax is the only bureau that sells FICO scores to consumers.

With the other bureaus, you get a proprietary score.

If you want FICO scores from all three bureaus, you can buy them at Fair Isaac Corp. (myfico.com) the company that developed the scoring system.

A home mortgage loan provider generally will pull all three of your credit scores and throw out the high and low ones.

When you get your scores, you should receive an analysis that includes how you rate in terms of other consumers and tips for improving your credit score.

Consumers generally need a score of 700 to 740 or more to get the best mortgage rates. Keep this in mind. Now go get ‘em.

SOURCE: Pittsburgh Post-Gazette / North Jersey Media Group