Credit score: Your path to a new home

By Charles Scutt, CTW Features

Like an athlete playing in the big game, it's always important to be mindful of the score, especially if you're yearning to claim the biggest prize of all: a new home. And the key to obtaining a mortgage loan with a preferred rate is to have a favorable credit score.

A credit score is a fast and easy way to distill the information from a person's credit report into a simple, three-number value. Your credit score is based on an array of factors, such as your outstanding debt, payment history, length of credit history, recent credit activity and types of credit in use.

“A credit score is like a report card of how well you are doing managing your credit,” says Brette Sember, author of “The Complete Credit Repair Kit” (Sourcebooks, 2005). “It's a quick, simple way of summing up what kind of consumer you are and how you manage your credit accounts.”

Your credit score is going to be the first thing a potential mortgage lender is going to look at, “and first impressions count,” Sember says. “Improving your credit score will make it easier for you to get a mortgage.”

In general, consumers with higher credit scores get lower interest rates, as they represent a lower risk to lenders.

The best-known credit score, FICO, was created by Fair Isaac Company, says Cate Williams, a vice president for Money Management International, Chicago, the nation's largest non-profit credit and debt counseling service. “But there are numerous credit scoring formulas that have been created by various companies. The scoring ranges can vary from model to model.”

The FICO model ranges from 300 to 850. There is not one magic number that says you have a good or poor credit score, but using mortgage lending guidelines, a score of 650 or above indicates a good credit history, says Williams.

Currently, the national average FICO score is roughly 723. In general, scores exceeding 750 typically are considered excellent, while those below 620 often are deemed as risky.

The three major credit reporting agencies - Experian, TransUnion and Equifax - rely on the FICO model to produce scores for lenders and business, although each agency has its own name for their FICO equivalent. Each agency also uses different ranges. For instance, Experian's range is from 330 to 830, while Equifax follows FICO's traditional 300 to 850 span.

Sember says the best way to improve your score is to regularly obtain your credit report and to proactively work toward improving your credit history.

Under the 2003 Fair and Accurate Credit Transactions Act, all Americans are entitled to a free copy of their credit report once every 12 months from each of the three credit-reporting agencies. You can obtain your complimentary report by visiting www.annualcreditreport.com, which is the only officially authorized Web site for consumers to access their credit report online for free. Consumers also can request a free copy toll-free at (877) 322-8228.

With either method, you'll be able to order reports from all three credit bureaus at the same time, which offers the advantage of comparing the reports all at once, or at different times throughout the year.

Avoid accessing your report directly from the credit agencies, which may try to charge you a fee unless you qualify for a complimentary report, or from suspicious Web sites. The Federal Trade Commission warns consumers to be cautious of companies that make claims regarding credit repair. These companies won't do anything for you that you cannot do for yourself at little or zero cost.

Be aware that while the report itself may be free, acquiring your credit score number typically carries a fee, usually between $5 and $10. You can purchase your credit score when you request your free credit report.

“There are no free ways to obtain your credit score,” Williams says.

When reviewing your credit report, read over all the information carefully and make note of any inaccuracies you see. You'll want to report them to the major credit agencies and request that they make changes to your report.

“If there are true errors in your credit report or if you need to have additional information reported, it will take time to correct, but it will improve your score,” Williams says.

The best ways to bolster your report and, consequently, beef up your score, are to reduce the amount of debt you owe, pay all your bills on time and within the agreed terms and only open new accounts when it's absolutely necessary, Williams says.

Be aware of how many open accounts you have in your report and how much money is available to you, said Sember. “And don't apply for loans you don't want because these are recorded as inquiries about your credit and will count against you.”

As a rule of thumb, Williams says it's wise to review both your credit report and score 60 to 90 days prior to seeking a mortgage loan, which should give you enough time to have any errors corrected.

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