Mortgage interest rates are still near historical lows, but with gradual Fed increases right on the horizon, it’s more important than ever to maintain a great credit score. In fact, keeping a top FICO score can save you tens of thousands – if not hundreds of thousands – of dollars over the life of the loan when it comes time to take out a mortgage loan.
While the most-used credit scoring model goes up to an 850, mortgage data reveals that a score around the 760 mark will get you the best possible interest rates on purchase and refinance loans. That’s certainly a very good score, but one that’s obtainable with some credit score education, patience, and diligence. But with credit (like with anything else) the first step is to not go backward by making the wrong financial moves, sending your score plummeting.
So to start, we want to teach you what mistakes to avoid on your way to building your great credit score.
Here are 10 of the most common credit score mistakes – and how to avoid them.
- Running up or maxing out your credit cards
Are you spending a lot on your credit cards, driving their balances up or even maxing them out? That could seriously hurt you come mortgage time. In fact, FICO calculates a significant portion of your score by your credit utilization ratio – how much debt you keep to how much your total available balances are. You may have heard that you should keep that ratio at or below 30% ($3,000 of debt for a credit card with $10,000 available). But credit experts now suggest that 10% or less is a better ratio to maintain to boost your score to the top.
So make sure to keep low balances on your credit accounts and definitely don’t max them out!
- Paying your balances down to zero and then closing them
Some people do just the opposite of maxing out a card when they pay the balance down to zero and then close the card. It often will hurt your credit score when you pay your debt down to zero and close your account, because what you just did was erase a positive and well-established record of paying on time. Big mistake! So to make sure you’re ready for that next mortgage, check with us to review your credit before you pay anything to zero or close out accounts.
- Not paying on time
If you want a great credit score, and therefore the best possible rate on your purchase or refinance loan, always pay by or before the due date. Since payment history is 35% of FICO’s scoring model, paying on time is crucial. It may seem like basic advice, but even one late payment or derogatory item on your credit report can hurt your score on a long-term basis, since they “stick” for seven years. According to FICO, 96% of people with a FICO score of 785 or greater have no late payments on their credit reports, so be one of those people who have a spotless payment history if you want the perfect FICO.
- Not keeping older accounts
Like we mentioned above, some people mean well when they pay their credit cards off and then close their accounts. However, if you close down older accounts, you’ll actually do more hard than good. Consider that 15% of FICO’s scoring factors credit history, with a preference for mature accounts that have been open and in good standing longer. (Anything that is older than 24-48 months is a huge boost to your credit score.)
So STOP before you close out any older credit account or tradeline, no matter how small or inconsequential it may seem, and check with us first if doing so would actually hurt your score.
- Not checking your score periodically
You should check your credit report periodically, making sure there are no errors that could be sinking your score – or even indicate bigger problems with identity theft or fraud. In fact, those crimes affect up to 1 in 8 Americans every year, and could take a lot of money and years to clear up, even if you’re just the victim. The good news is that you can receive a free copy of your credit report from each of the three bureaus once per year, or an ongoing credit monitoring service is a wise idea if you want to keep a great score and get the best mortgage loan.
- Failing to dispute incorrect, outdated, or duplicate info
Are you assuming that everything is correct on your credit score? That’s a HUGE mistake these days, as a study by the Federal Trade Commission reported that at least 20% of consumers have an error on their credit reports. Those simple mistakes will cost you dearly when it comes time to get a mortgage, causing you to get a higher interest rate than you deserve, or even losing that dream home you set out to purchase.
When you notice an incorrect, outdated, or duplicated item on ANY of your credit reports, make sure you take action. There’s a simple process you can follow of filing a complaint online or writing a letter to the credit bureau in question, and by law they have to prove the reporting is accurate or clean up the problem within a certain time frame. Contact us if you’d like help!
- Not mixing it up
Many people don’t realize that it could be a mistake not to keep the right mix of debt. In fact, FICO calculates 10% of your score based on what mix of different kinds of credit accounts you keep, and they want to see a healthy balance of credit cards, Installment loans, auto, revolving, and mortgage debt. So if you make the mistake but having too many credit cards open, but no mortgage debt or installment loans at all, for instance, FICO may penalize you, even if everything is in good standing.
- Shopping around for loans too often
When you’re thinking about applying for a mortgage or other loan, what you definitely don’t want to do is start submitting applicatons and credit checks all over town, and over a prolonged timeframe since 10% of your FICO score depends on whether you have applied for credit recently. Of course, it’s necessary to search for the best loans, especially on big-ticket items like mortgages and car loans, but when you “shop around,” make sure it’s all within a 30-day window. FICO won’t factor those pulls into your score, and even if they are spread out within 45 days, they’ll only be treated as one credit inquiry.
When you do business with Guild Mortgage, we can “shop” around for the best mortgage loan with hundreds of banks and lenders on your behalf so you’ll be confident you’re getting the best deal.
- Opening the wrong tradelines
Along those lines, it’s a big mistake to apply for “low-quality” loans, as FICO will penalize you accounts and tradelines they deem riskier. For instance, your new Amex or big-name bank loan won’t hurt your credit, but taking out debt with a Rent-a-Center, payroll advance service, or discount store cards may clip your score. FICO actually calculates 10% of your score based on what kind of new credit you’re applying for and opening, so say “no” to that discount if you apply for a card when they ask you at the cash register!
- Making financial moves during the mortgage process
Are you buying a house or looking at a refinance and you innocently move $50,000 from savings to checking, pay off your car, or take a new job? Unfortunately, you may have just thrown your credit report out of whack and jeopardize your chances of getting a great loan – or any loan at all. It’s critical that you understand what NOT to do during the mortgage application process, so contact us for a free copy of our special report, 20 Things NOT to do when applying for a home loan.