Q: What is the best way to improve my credit score if I want to buy a house?—Casey G.
A. Casey may not know it, but she just asked what I call the “Million Dollar Question,” and not just because it’s a great question. Having great credit scores will likely save you hundreds of thousands—if not millions—of dollars in interest over your credit lifecycle.
In fact, I’ll even go as far as to suggest this: Having great credit scores should be on your list of wealth building strategies. I mean, why pay six percent interest for a mortgage loan when you can pay three percent? Why pay 12 percent for an auto loan when you can get some loans at zero percent right now? It certainly adds up in your favor: Great scores justify low rates on things you’re likely going to finance anyway.
When it comes to improving your scores in advance of buying a house, the issue becomes more complex. Mortgage lenders pull all of your credit reports and all three of your FICO® credit scores from the three major bureaus. If you’re applying jointly, that’s a whole other set of three reports and three scores. All in all, the lender will be basing their decision on six credit reports and six FICO scores.
Mortgage lenders base their decision on your middle numeric. Meaning: If you’ve got a 750 FICO score at Experian, a 725 FICO score at Equifax, and a 675 FICO score at TransUnion the lender will focus on the middle 725 score. It’s a conservative approach to underwriting, and only mortgage lenders use this “middle score” approach.
All other consumer loans and credit cards use a “single score” approach. They pull just one of your three credit reports and credit scores. Unfortunately, it’s difficult to tell which credit report they’re going to pull and on what FICO score they’ve base their lending decision.
In short, it’s in your best interest to ensure that you’ve got great credit scores across the board. The best way to improve your credit scores is to identify why they’re not higher in the first place.
Now, I recognize that sounds like a non-answer, but there simply is no blanket advice to give to every single one of the 80,000,000 consumer who have FICO scores below 700. Sure—pay your bills on time, keep your credit card debt low, and only shop for credit when it’s necessary is all strong advice, but it’s as vanilla as a nutritionist saying “consume fewer calories and exercise more” for diet advice.
Not all low credit scores are created equal. My 650 may be caused primarily because of credit card debt while your 650 may be caused by late payments. Someone else’s 650 may be caused by an eight year old bankruptcy, followed by sterling credit management.
If your low scores are caused by negative information on your credit reports and that information is accurate, you may have to live with your lower scores until the information ages off your credit reports. Keep in mind, the presence of negative information only accounts for 35 percent of the points in your FICO score, meaning 65 percent of the points are still attainable. But, be warned, you’ll have to have practically no credit card debt, no credit inquiries and a well-aged credit report to counterbalance the negative information.
If your low scores are caused by credit card debt then it may be just as in-actionable as having negative information on your credit reports, unless you can write a big check. But, again, we’re talking about a category that’s worth just 30 percent of the points in your score. Another 70 percent is still at play. Trust me, I’d much rather be in this situation than the former. Even if you can lower your credit card debt by just 10 percent, you’ll likely see an improvement in your scores by the next month.
When you get around to optimizing your credit scores step one is the diagnostic–or identifying what’s keeping your scores low. The best way to do that is to focus on the “score factors” that accompany every credit score. Those factors are the top four reasons why your score isn’t higher. They will act as a road map and help you strategize your score improvement actions, so you’re not wasting time doing these that have little or no return on your investment of time or money.
If you’re reading this article then you deserve a pat on the back. Having a good credit score can not only save you tons of money, it can also greatly increase your confidence in tackling your dreams such as buying your own home. Without good credit it’s easy to put such dreams in the back seat.